Simple accounting info

Every transaction lead to (at least) two entries in your accounts, a debit and a credit.

Easy way to understand where to put your debits and credits

• A Debit to the balance sheet is good (increasing an asset or reducing a liability)
• A Debit to the profit and loss is bad (increasing an expense or reducing income)
• A Credit to the balance sheet is bad (reducing an asset or increasing a liability)
• A Credit to the profit and loss is good (increasing income or reducing an expense)

Accountants and bookkeepers often use T-accounts as a visual aid for seeing the effect of the debit and credit on the two (or more) accounts. (Learn more about accountants and bookkeepers in our Accounting Careers area.) We will begin with two T-accounts: Cash and Notes Payable.

T-accounts

Cash (asset account)

Debit Increases an asset Received $				Credit Decreases an asset Paid $

Notes Payable (liability account)

Debit Decreases a liability Repaid loan				Credit Increases a liability Borrowed more

1. On June 1, 2012 a company borrows $5,000 from its bank. This causes the company's asset Cash to increase by $5,000 and its liability Notes Payable to also increase by $5,000. To increase the asset Cash the account needs to be debited. To increase the company's liability Notes Payable this account needs to be credited. After entering the debits and credits the T-accounts look like this:

Cash (asset account)

Debit Increases an asset Received $				Credit Decreases an asset Paid $
June 1, 2012 ENTRY	5,000

Notes Payable (liability account)

Debit Decreases a liability Repaid loan				Credit Increases a liability Borrowed more
				5,000		ENTRY June 1, 2012

2. On June 2, 2012 the company repaid $2,000 of the bank loan. This causes the company's asset Cash to decrease by $2,000 and its liability Notes Payable to also decrease by $2,000. To reduce the asset Cash the account will need to be credited for $2,000. To decrease the liability Notes Payable that account will need to be debited. The T-accounts now look like this:

Cash (asset account)

Debit Increases an asset Received $				Credit Decreases an asset Paid $
June 1, 2012 ENTRY	5,000
				2,000		ENTRY June 2, 2012
June 2, 2012 BALANCE	3,000

Notes Payable (liability account)

Debit Decreases a liability Repaid loan				Credit Increases a liability Borrowed more
				5,000		ENTRY June 1, 2012
June 2, 2012 ENTRY	2,000
				3,000		BALANCE June 2, 2012

Journal Entries

Another way to visualize business transactions is to write a general journal entry. Each general journal entry lists the date, the account title(s) to be debited and the corresponding amount(s) followed by the account title(s) to be credited and the corresponding amount(s). The accounts to be credited are indented. Let's illustrate the general journal entries for the two transactions that were shown in the T-accounts above.

Date	Account Name		Debit	Credit
June 1, 2012	Cash		5,000
		Notes Payable		5,000

Date	Account Name		Debit	Credit
June 2, 2012	Notes Payable		2,000
		Cash		2,000

Debited and Credited of Cash

 it is helpful to memorize the following:

• Whenever cash is received, debit Cash.
• Whenever cash is paid out, credit Cash.

With the knowledge of what happens to the Cash account, the journal entry to record the debits and credits is easier. Let's assume that a company receives $500 on June 3, 2012 from a customer who was given 30 days in which to pay. (In May the company recorded the sale and an accounts receivable.) On June 3 the company will debit Cash, because cash was received. The amount of the debit and the credit is $500. Entering this information in the general journal format, we have:

Date	Account Name		Debit	Credit
June 3, 2012	Cash		500
		???		500

All that remains to be entered is the name of the account to be credited. Since this was the collection of an account receivable, the credit should be Accounts Receivable. (Because the sale was already recorded in May, you cannot enter Sales again on June 3.)


On June 4 the company paid $300 to a supplier for merchandise the company received in May. (In May the company recorded the purchase and the accounts payable.) On June 4 the company will credit Cash, because cash was paid. The amount of the debit and credit is $300. Entering them in the general journal format, we have:

Date	Account Name		Debit	Credit
June 4, 2012	???		300
		Cash		300

All that remains to be entered is the name of the account to be debited. Since this was the payment on an account payable, the debit should be Accounts Payable. (Because the purchase was already recorded in May, you cannot enter Purchases or Inventory again on June 4.)

memorize the following tip:

Whenever cash is received, the Cash account is debited (and another account is credited).

Whenever cash is paid out, the Cash account is credited (and another account is debited).

Normal Balances

When looking at a T-account for each of the account classifications in the general ledger, here is the debit or credit balance you would normally find in the account:

Account Classification	Normal Balance
Assets	Debit
Contra asset	Credit
Liability	Credit
Contra liability	Debit
Owner's Equity	Credit
Stockholders' Equity	Credit
Owner's Drawing or Dividends Account	Debit
Revenues (or Income)	Credit
Expenses	Debit
Gains	Credit
Losses	Debit

Revenues and Gains Are Usually Credited

Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry.

The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts--these accounts have debit balances because they are reductions to sales. Accounts with balances that are the opposite of the normal balance are called contra accounts; hence contra revenue accounts will have debit balances.

Let's illustrate revenue accounts by assuming your company performed a service and was immediately paid the full amount of $50 for the service. The debits and credits are presented in the following general journal format:

	Account Name		Debit	Credit
	Cash		50
		Service Revenues		50

Whenever cash is received, the asset account Cash is debited and another account will need to be credited. Since the service was performed at the same time as the cash was received, the revenue account Service Revenues is credited, thus increasing its account balance.


Let's illustrate how revenues are recorded when a company performs a service on credit (i.e., the company allows the client to pay for the service at a later date, such as 30 days from the date of the invoice). At the time the service is performed the revenues are considered to have been earned and they are recorded in the revenue account Service Revenues with a credit. The other account involved, however, cannot be the asset Cash since cash was not received. The account to be debited is the asset account Accounts Receivable. Assuming the amount of the service performed is $400, the entry in general journal form is:

	Account Name		Debit	Credit
	Accounts Receivable		400
		Service Revenues		400

Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit.

Expenses and Losses are Usually Debited

Expenses normally have their account balances on the debit side (left side). A debit increases the balance in an expense account; a credit decreases the balance. Since expenses are usually increasing, think "debit" when expenses are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest Expense.

To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord for the June rent. The debits and credits are shown in the following journal entry:

	Account Name		Debit	Credit
	Rent Expense		800
		Cash		800

Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. If the payment was made on June 1 for a future month (for example, July) the debit would go to the asset account Prepaid Rent.

As a second example of an expense, let's assume that your hourly paid employees work the last week in the year but will not be paid until the first week of the next year. At the end of the year, the company makes an entry to record the amount the employees earned but have not been paid. Assuming the employees earned $1,900 during the last week of the year, the entry in general journal form is:

	Account Name		Debit	Credit
	Wages Expense		1,900
		Wages Payable		1,900

As noted above, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable. A credit to a liability account increases its credit balance.
memorize the following tip: 
To increase an expense account, debit the account

Bank's Debits and Credits

When you hear your banker say, "I'll credit your checking account," it means the transaction will increase your checking account balance. Conversely, if your bank debits your account (e.g., takes a monthly service charge from your account) your checking account balance decreases.

If you are new to the study of debits and credits in accounting, this may seem puzzling. After all, you learned that debiting the Cash account in the general ledger increases its balance, yet your bank says it is crediting your checking account to increase its balance. Similarly, you learned that crediting the Cash account in the general ledger reduces its balance, yet your bank says it is debiting your checking account to reduce its balance.

Although the above may seem contradictory, we will illustrate below that a bank's treatment of debits and credits is indeed consistent with the basic accounting principles you learned. Let's look at three transactions and consider the resultant journal entries from both the bank's perspective and the company's perspective.



Transaction #1

Let's say that your company, Debris Disposal, receives $100 of currency from a customer as a down payment for a future site cleanup service. When the money is received your company makes the following entry:

(Debris Disposal's journal entry)

	Account Name		Debit	Credit
	Cash		100
		Unearned Revenues		100

Because it has received cash, Debris Disposal increases its Cash account with a debit of $100. The rules of double entry accounting require Debris Disposal to also enter a credit of $100 into another of its general ledger accounts. Since the company has not yet earned the $100, it cannot credit a revenue account. Instead, the liability account Unearned Revenues is credited because Debris Disposal has a liability to do the work or to return the $100. (An alternate title for the Unearned Revenues account is Customer Deposits.)

Now let's say you take that $100 to Trustworthy Bank and deposit it into Debris Disposal's checking account. Trustworthy Bank debits the bank's general ledger Cash account for $100, thereby increasing the bank's assets. The rules of double entry accounting require the bank to also enter a credit of $100 into another of bank's general ledger accounts. Because the bank has not earned the $100, it cannot credit a revenue account. Instead, the bank credits its liability account Deposits to reflect the bank's obligation/liability to return the $100 to Debris Disposal on demand. In general journal format the bank's entry is:

(Trustworthy Bank's journal entry)

	Account Name		Debit	Credit
	Cash		100
		Deposits (your statement)		100

As the entry shows, the bank's assets increase by the debit of $100 and the bank's liabilities increase by the credit of $100. The bank's detailed records show that Debris Disposal's checking account is the specific liability that increased.



Transaction #2

Let's say Trustworthy Bank receives a $1,000 wire transfer on your company's behalf from a person who owes money to Debris Disposal. Two things happen at the bank: (1) The bank receives $1,000, and (2) the bank records its obligation to give the money to Debris Disposal on demand. These two facts are entered into the bank's general ledger as follows:

(Trustworthy Bank's journal entry)

	Account Name		Debit	Credit
	Cash		1,000
		Deposits (your statement)		1,000

The debit increases the bank's assets by $1,000 and the credit increases the bank's liabilities by $1,000. The bank's detailed records show that Debris Disposal's checking account is the specific liability that increased.

At the same time the $1,000 wire transfer is received at the bank, Debris Disposal makes the following entry into its general ledger:

(Debris Disposal's journal entry)

	Account Name		Debit	Credit
	Cash		1,000
		Accounts Receivable		1,000

As a result of collecting $1,000 from one of its customers, Debris Disposal's Cash balance increases and its Accounts Receivable balance decreases.



Transaction #3

Many banks charge a monthly fee on checking accounts. If Trustworthy Bank decreases Debris Disposal's checking account balance by $13.00 to pay for the bank's monthly service charge, this might be itemized on Debris Disposal's bank statement as a "debit memo." The entry in the bank's records will show the bank's liability being reduced (because the bank owes Debris Disposal $13 less). It also shows that the bank earned revenues of $13 by servicing the checking account.

(Trustworthy Bank's general ledger)

	Account Name		Debit	Credit
	Deposits (your statement)		13
		Service Charge Revenues		13

On your company's records, the entry will look like this:

(Debris Disposal's general ledger)

	Account Name		Debit	Credit
	Bank Service Charges Expense		13
		Cash		13

Debris Disposal's cash is reduced with a credit of $13 and expenses are increased with a debit of $13. (If the amount of the bank's service charges is not significant a company may debit the charge to Miscellaneous Expense.)

Bank's Balance Sheet

Accounts such as Cash, Investment Securities, and Loans Receivable are reported as assets on the bank's balance sheet. Deposits are reported as liabilities and include the balances in its customers' checking and savings accounts as well as certificates of deposit. In effect, your bank statement is just one of thousands of subsidiary records that account for millions of dollars in Deposits that a bank owes to its customers.

highlights from this major topic:

• Debit means left.
• Credit means right.
• Every transaction affects two accounts or more.
• At least one account will be debited and at least one account will be credited.
• The total of the amount(s) entered as debits must equal the total of the amount(s) entered as credits.
• When cash is received, debit Cash.
• When cash is paid out, credit Cash.
• To increase an asset, debit the asset account.
• To increase a liability, credit the liability account.
• To increase owner's equity, credit an owner's equity account.
• To increase revenues, credit the revenues account
• To increase expenses, debit the expense account