Debits and Credits

Transactions such as the ones youve been recording in the accounting equation are recorded in accounts using a double entry accounting system. This system records increases and decreases to accounts with debits and credits. The rules of debits and credits are simple and few: 1) Total debits must equal total credits for each transaction. 2) Due to rule #1, there must be at least two accounts involved. (This is a minimum. There can be more than two.) HOW DEBITS AND CREDITS WORK: Left side of an account is called the debit side, right side is called the credit side

debit (Dr) and credit (Cr) do not necessarily mean increase and decrease, only left and right. Some accounts increase with a debit and other increase with a credit. Debits and credits are not bad or good, only left and right

Lets use the accounting equation to see how the rules of debit and credit apply: Assets = Liabilities + Stockholders Equity Now lets expand that a bit: Assets = Liabilities + Capital Stock + Retained Earnings Lets expand that even further: Assets = Liabilities + Capital Stock + Revenue - Expenses - Dividends OKnow, use algebra to make all of the variable positive and you have the following: Assets + Expenses + Dividends = Liabilities + Capital Stock + Revenue Accts on the left: Increase with a debit Decrease with a credit Accts on the right: Increase with a credit Decrease with a debit

SUMMARY:
Asset Expense Dividend Liability Capital Stock Revenue

Increase Decrease Normal balance* *

Dr Cr Dr

Dr Cr Dr

Dr Cr Dr

Cr Dr Cr

Cr Dr Cr

Cr Dr Cr

An accounts normal balance is usually on the side where the account increases. Normal balance is the balance we usually expect the account to have.