What Are Debits & Credits in Accounting?

Debits and credits make up the double entry system of accounting used since the 1400s. Every transaction has two parts, a debit and a credit, and in accounting, they must be equal. Debits increase assets and decrease liabilities as well as equity. Credits increase equity and liabilities and decrease assets.

Types

Debits and credits on a financial balance sheet appear in two columns, debits on the left, credits on the right. Examples of accounts that are increased with a debit are assets, dividends, expenses, and losses. Accounts that are increased with a credit are liabilities, stockholder's equity, revenues, income, and gains. An account is decreased on one side of the balance sheet when another account is increased on the opposite side of the balance sheet. For example, if you buy a computer for your business using cash, your cash account will be credited, decreased, while your expenses will be debited, or increased.

Function

On a financial balance sheet, debit entries must always equal credit entries, as they offset each other. For example, if you are making payments on a home mortgage, your home is an asset; the loan against it is the liability. When you make your payment, it has two parts for accounting purposes, a debit and a credit. After you make the payment, you will own more of your home and owe less on the loan. Your payment has effectively increased the value of an asset while decreasing the value of the liability.

Considerations

Double entry bookkeeping requires at least one credit and one debit for each transaction. Some entries may fall into three categories, but the debits must always equal the credits. For example, when you make your mortgage payment, three accounts are actually affected, cash, notes payable and interest expense. Your cash is credited, or decreased, while your liability is debited, or reduced, for the amount of the principle portion of the payment and the interest expense account is debited for the portion of the interest on the loan.

Significance

Debits and credits are tools used to evaluate one's financial condition. For example, when you buy supplies, your cash is decreased, or credited, and your inventory is increased, or debited.

Benefits

Double entry accounting using debits and credits has worked for over 500 years, even if it is a bit confusing. This system allows for checks and balances on each account making it easier to find bookkeeping errors and also easier to assess financial well being at a glance.

Resources

• Free Accounting Information