About debits and credits

In double-entry accounting, each time you perform an action that has a financial impact, a transaction is recorded. Transactions affect two or more accounts as money is moved from one account to another. Debits and credits are used to record these transactions to the General Journal and the associated Account Activity Lists. To record a transaction, the total amount debited and the total amount credited must always be equal so your books will balance.

Before computers, transactions were recorded on a paper ledger. When a transaction was recorded, the associated accounts were written in the ledger and the amount of each account was entered in either the left side or the right side depending on the account type (Asset, Liability, Expense, etc) and whether the account was being increased or decreased by the transaction.

Debits and credits don't mean increase or decrease, but refer to which side of the ledger the amount gets recorded to: the left side for debits and the right side for credits.

 

In computerized accounting, like WorkingPoint, you don't have to record transactions directly into the ledger. Instead, you use specific forms, like Deposit, Invoice, and Record Payment or Purchase, to record your business activity. But under the hood, credits and debits are still being recorded to keep the books in balance.

For example, when you complete the Record Payment or Purchase form, WorkingPoint credits your bank account for the total amount of the payment or purchase and debits the accounts you chose to distribute the amounts to.

Complete the forms and WorkingPoint will take care of the rest. If you want to see the actual credits and debits, you can click a transaction's link.

If you prefer entering transactions using debits and credits, or your Accountant asks you to enter some closing entries, you can make an adjusting entry in the General Journal. The adjusting entry lets you debit and credit accounts as needed. See the table below for how debits and credits affect the balance of an account.

How debits and credits affect account balances

This table shows how the debits or credits affect the balance of accounts by account type. Values are recorded to the journal as positive values. It is the column that determines whether the value increases or decreases the account balance.

Account Type:

Debit (left side)

Credit (right side)

Assets

Increases +

Decreases -

Liabilities

Decreases -

Increases +

Equity

Decreases -

Increases +

Revenue

Decreases -

Increases +

Cost of Sales/Cost of Goods Sold

Increases +

Decreases -

Expense

Increases +

Decreases -

If you are recording an amount for an asset in the debit column (left side), the account value for the asset will increase. Assets are things like bank accounts, accounts receivable, inventory, equipment, and other depreciable property. Liabilities are increased by credits (right side). Liabilities are things like accounts payable (bills you owe) and other debts like loans.

When you look at the Activity List for an account, you will see the entries as positive or negative amounts based on the table above. This is because you are seeing how each transaction has affected a particular account.

 

Related Topics

What is double-entry accounting?

About asset, liability and equity accounts