Understanding Debits and Credits

DEBIT AND CREDIT

RULE NO. 2:

For every debit, there is a credit.

Paying close attention to the previous topics discussed, this eternal rule in accounting has an identical goal with that of the basic accounting equation: KEEP BOTH SIDES EQUAL. Whatever happens.

The terms debit and credit are used in recording business transactions which will indicate the increases or decreases of a specific account, be it an asset, liability, owner’s equity or capital, revenue, expenses and the owner’s drawings. Being on the left side of the equation, all assets will increase on the left side or debit side and its corresponding “partner” account like for example, the investment of an owner, will take the right side or credit side.

Going back to The Tiny Mermaid Smiles Photo Booth, one of the transactions entered into by the business was the purchase of an asset (go back to Link-In transaction #2) using another asset of the business:

Both are Assets

DEBIT CREDIT

Account Amount Account Amount

Camera 25,000 Cash 25,000

Asset and Liability

In the first illustration, Tiny Mermaid entered increases in Camera (an asset) on the debit side and decreases in cash (another asset) on the credit side. It follows then that the increases and decreases must be recorded in the opposite manner as assets since liabilities and owner’s equity are both on the right side of the equation. So that when Tiny Mermaid bought another asset on account (refer to transaction 3) it results in:

DEBIT CREDIT

Account Amount Account Amount

Computer

Equipment 28,000 Accounts Payable 28,000

Owner’s Equity or Capital

As mentioned already, the two items that increase business equity or capital are investments and revenues. While the other two items that cause equity or capital t...

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...IT

3. Remember rules no. 1 and 2.

4. Practice makes perfect. This is a do-it-yourself course.

Works Cited

http://documents.clubexpress.com/documents.ashx?key=7ZPfhrgSH4ej5qOo06gTZ1j%2FWfzYw%2BhpXBNOQ%2BbRiWgYV1UQpbPezRxbi%2FPDVo7X 2002 Association of Chartered Accountants in the United

States 341 Lafayette St., Ste. 4246 • New York, NY

10012-2417 • [phone]

Darrell Mullis & Judith Orloff, The Accounting Game (Basic Accounting Fresh from the Lemonade Stand) updated and revised; Naperville, Illinois 60567; 2008 – published by Sourcebooks, Inc.

Robert T. Kiyosaki, Sharon L. Lechter, Rich Dad Poor Dad, 2002

David Marshall, Bean Counter

Weygandt, Accounting Principles

The Entrepreneur’s GuideBook by Patsula Media, smallbusinesstown.com, Personal Planning Guidebook#28

http://mycasite.com/for_web/pages/articles/industry/pdfs/23_brief_history_accounting.pdf