Fundamentals of Debits and Credits

The double entry bookkeeping system is based on the following principles:

  • an expense or an increase in an asset is reported as a debit,
  • an increase in a liability, an increase in equity and revenue are all reported as a credit,
  • conversely, a decrease in an asset and a reduction in an expense are reported as a credit,
  • similarly, a decrease in a liability, a decrease in equity and a reduction in revenue are reported as a debit,
  • all financial transactions are recorded as both a debit and a credit, but to different accounts,
  • for any transaction the total of all debits must equal the total of all credits.

The first four principles are simply accounting conventions ñ the rules of the road, as it were. Thus, by convention, an asset account and an expense account will normally be a debit account or, more accurately, a positive balance in such an account will be referred to as a debit. Similarly, by convention, a positive balance in a liability account, an equity account or a revenue account will be referred to as a credit.

The fifth principle, that each financial transaction results in both a debit and a credit, is a reflection of the fundamental accounting equation. Recall:

Equity = Assets ñ Liabilities + Current Period Revenue ñ Current Period Expenses

The final principle, that debits always equal credits, provides a self-checking mechanism in double entry bookkeeping. Because of this rule, it is easy to check whether accounts have been posted accurately. If the total all debit accounts equals the total of all credit accounts, you can be sure that this is true. Note, however, that the fact that total debits equals total credits does not ensure that the proper accounts were posted ñ only that the numeric values assigned to debits and credits are equal.

Excerpted from Basic Bookkeeping for Business, one of the courses that comprise the Certified Bookkeeping Specialist program.