Debits and Credits: (Cheat Sheet)
Debits and Credits: (Cheat Sheet)
Debits and Credits: (Cheat Sheet)
(Cheat Sheet)
Harold Averkamp
CPA, MBA
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Meaning of Debits and Credits
Debit and credit are related to the terms used in Italy 500 years ago to record business transactions
using the double-entry system of accounting. Today, you should memorize the following meanings:
An amount recorded on the left side of an account is said to have been debited to the account, or
that the amount was a debit (or debit entry) in the account. An amount recorded on the right side of
an account is said to be a credit entry, a credit, or that the account was credited.
It is important that you do not think that a debit is “good” or “bad”. Similarly, you should not think of
a credit as being “good” or “bad”.
Account
An account is a record in which the amounts from a company’s transactions are posted (or
recorded) in order to sort and store similar amounts. The following are common account titles: Cash,
Accounts Receivable, Accounts Payable, Loans Payable, Sales, Advertising Expense, Rent Expense,
Interest Expense, and perhaps hundreds more.
When we use the term accounts, we are referring to the general ledger accounts. In the past, the
general ledger was a ledger book with paper pages, but today it is likely to be a computer file or
database.
A simple listing of the general ledger account titles and account numbers that are available for use is
the chart of accounts.
Example #1.
When a company borrows $5,000 from its bank, the company will record a debit of $5,000 in the
account entitled Cash and a credit of $5,000 in the account Loans Payable or Notes Payable.
Example #2.
When a company pays $1,000 for a loan payment consisting of $100 of interest and $900 of principal
the company will record a debit of $100 in the account Interest Expense, a debit of $900 to Loans
Payable, and a credit of $1,000 in the account Cash.
It is common for inexpensive, yet sophisticated accounting software to use the double-entry system,
however, it may prompt you for only one account name or number. For example, if the software
prepares a check, it will automatically credit the account Cash when the check is written. Therefore,
the software requires that you enter only the account or accounts to be debited.
Asset accounts, which are on the left side of the equation, will usually have their balances on the left
side of the general ledger account. Since debit means left side, an asset account will normally have a
debit balance.
Stockholders’ equity accounts, which also appear on the right side of the accounting equation, will
usually have their account balances on the right side.
• Cash
• Accounts Receivable
• Inventory
• Prepaid Expenses
• Investments
• Land
• Buildings
• Furniture and Fixtures
• Vehicles, and more
Generally, asset accounts will have debit balances and their account balances will be increased with a
debit entry. Therefore, a credit entry will decrease the asset’s normal debit balance.
There are a few asset accounts that are expected to have credit balances. These are known as
contra-asset accounts. Two examples of contra-asset accounts include:
• Allowance for Doubtful Accounts (which relates to the debit balance in Accounts Receivable)
• Accumulated Depreciation (which relates to the debit balances in the accounts Buildings,
Equipment, Vehicles, etc.)
These contra-asset accounts will be credited instead of crediting the related asset accounts.
• Accounts Payable
• Loans Payable (or Notes Payable)
• Interest Payable
• Wages Payable
• Income Taxes Payable
• Accrued Expenses Payable (or Accrued Liabilities)
• Deferred Revenues, and others
Generally, liability accounts are expected to have credit balances and their account balances will be
increased with a credit entry. To decrease a liability account’s balance a debit entry is needed.
• Common Stock
• Paid-in Capital in Excess of Par
• Retained Earnings
• Accumulated Other Comprehensive Income
• Mary Smith, Capital
Generally, these accounts are expected to have credit balances and their account balances will be
increased with a credit entry. To decrease one of these accounts a debit entry is needed.
Note: Treasury Stock and Mary Smith, Drawing are two contra-equity accounts that are
expected to have debit balances.
• Sales
• Service Fees Earned
• Fee Revenues
• Interest Income
Revenue accounts will have credit balances and their account balances will be increased with a credit
entry. Revenue accounts have credit balances because revenues increase stockholders’ (or owner’s)
equity.
There are a few revenue accounts that will have debit balances. Two examples are:
• Sales Discounts
• Sales Returns and Allowances
Revenue accounts that are expected to have debit balances are know as contra-revenue accounts.
These accounts are debited because they cause a decrease in the expected credit balances of the
stockholders’ (or owner’s) equity accounts.
• Salaries Expense
• Rent Expense
• Utilities Expense
• Repairs and Maintenance Expense
• Advertising Expense
• Depreciation Expense
• Interest Expense
• Income Tax Expense
• Cash will be debited when cash is received. (Recall that a debit will increase an asset account’s
balance.)
• Cash will be credited when cash is paid out. (Recall that a credit will decrease an asset account’s
balance.)
In our earlier examples, a company borrowed money from its bank. The account Cash has to be
debited because the company is receiving $5,000 of cash from its bank. Because of double-entry
accounting, another account will be credited for $5,000. In this case, the company should credit Loans
Payable or Notes Payable. This credit makes sense because the balance in a liability account needs
to be increased.
In our other example, when a company pays a bill, the asset account Cash needs to be credited for
$1,000 in order to reduce this asset’s normal debit balance. Therefore, one or more accounts will
need to be debited. Since $100 of the payment was for interest, the account Interest Expense will be
debited. The $900 principal repayment will be debited to the liability account Loans Payable. (Recall
that liability accounts are decreased with a debit entry.)
If a company buys a new machine at a cost of $20,000 by writing a check for $12,000 and promising
to pay $8,000 in six months, the company will debit the asset Machinery for $20,000; credit Cash for
$12,000; and credit Loans Payable or Notes Payable for $8,000.
Dividends
Expenses
Assets
Losses
You could think of the acronym GIRLS when learning which accounts will be increased with a credit
entry. Use the first letter from the following five types of accounts to spell G-I-R-L-S:
Gains
Income
Revenues
Liabilities
Stockholders’ (or owner’s Equity)
Trial Balance
If each transaction is recorded with debits equal to credits, and there are no math errors in
calculating the account balances, then the accounts will be in balance. A trial balance is an internal
report that lists all of the account balances in the respective debit or credit column. The amounts in
each column should sum to the same total. (Today’s popular accounting software is programmed
However, a balanced trial balance does not guarantee that the records are free of errors. For
example, an entry could be completely omitted or could be entered twice and the trial balance will
be in balance. Also, the monthly rent payment could be coded incorrectly as a debit to an asset
account instead of a debit to Rent Expense and the trial balance will be in balance.