Debits and credits are the basis for double entry bookkeeping. Each entry has a second entry that balances it out.
Every transaction has two entries a Debit (Dr) and a Credit (Cr). In accounting software, the transactions are posted for you. If you are running a manual system, you may need to post them yourself.
Everyone studying accounting will need to learn the difference between Debits and Credits and how to use journals to make adjustments.
Debits and Credits Rules
There are several rules which will make it easier to learn.
- Accounts are made up of a T with debits on the left and credits on the right.
- For each debit, there must be an equal credit. In some cases, you may need to post to more than one account; you need to ensure that the two sides balance.
- Debits increase asset or expense accounts and decrease liability or equity.
- Credits decrease assets and expenses and increase liability and equity.
There are two acronyms to help you remember this:
DEAL – Generally, these types of accounts are increased with a debit: Dividends, Expenses, Assets, Losses.
GIRLS – Generally, these types of accounts are increased with a credit: Gains, Income, Revenues, Liabilities, Stockholders’ Equity
Debits and Credits Cheat Sheet
Our Debits and Credits cheat sheet below will help you to visualise the difference.
The highlighted green on assets and expenses shows an increase in assets and expenses. Highlighted green on Liabilities, Capital and income, show a decrease.
The red shows a decrease in assets and expenses, but an increase in liabilities, capital and income.
Debits and Credits Example
Here is an example:
A business pays a wage of 500.00 to a staff member. The wage is an expense, so will be a debit, and the balancing credit will be to the bank.
At the end of a period, a trial balance report will be produced; this will include all the debits and credits, both sides of the report will balance.
If an adjustment is required on an account, a journal entry will be created. As with all double entries, two transactions will take place, a debit and a credit.
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