Explanation of the Topic...Debits and Credits |
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Accountants and bookkeepers often use T-accounts as a visual aid for seeing the effect of the debit and credit on the two (or more) accounts. (Learn more about accountants and bookkeepers in our Accounting Careers area.) We will begin with two T-accounts: Cash and Notes Payable.
Debit |
Credit | |||||
Debit |
Credit | |||||
Let's demonstrate the use of these T-accounts with two transactions:
Debit |
Credit | |||||
| June 1, 2012 ENTRY | 5,000 | |||||
Debit |
Credit | |||||
| 5,000 | ENTRY June 1, 2012 | |||||
Debit |
Credit | |||||
| June 1, 2012 ENTRY | 5,000 | |||||
| 2,000 | ENTRY June 2, 2012 | |||||
| June 2, 2012 BALANCE | 3,000 | |||||
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Debit |
Credit | |||||
| 5,000 | ENTRY June 1, 2012 | |||||
| June 2, 2012 ENTRY | 2,000 | |||||
| 3,000 | BALANCE June 2, 2012 | |||||
Another way to visualize business transactions is to write a general journal entry. Each general journal entry lists the date, the account title(s) to be debited and the corresponding amount(s) followed by the account title(s) to be credited and the corresponding amount(s). The accounts to be credited are indented. Let's illustrate the general journal entries for the two transactions that were shown in the T-accounts above.
| Date | Account Name | Debit | Credit | |
| June 1, 2012 | Cash | 5,000 | ||
| Notes Payable | 5,000 | |||
| Date | Account Name | Debit | Credit | |
| June 2, 2012 | Notes Payable | 2,000 | ||
| Cash | 2,000 | |||
Because cash is involved in many transactions, it is helpful to memorize the following:
With the knowledge of what happens to the Cash account, the journal entry to record the debits and credits is easier. Let's assume that a company receives $500 on June 3, 2012 from a customer who was given 30 days in which to pay. (In May the company recorded the sale and an accounts receivable.) On June 3 the company will debit Cash, because cash was received. The amount of the debit and the credit is $500. Entering this information in the general journal format, we have:
| Date | Account Name | Debit | Credit | |
| June 3, 2012 | Cash | 500 | ||
| ??? | 500 | |||
All that remains to be entered is the name of the account to be credited. Since this was the collection of an account receivable, the credit should be Accounts Receivable. (Because the sale was already recorded in May, you cannot enter Sales again on June 3.)
On June 4 the company paid $300 to a supplier for merchandise the company received in May. (In May the company recorded the purchase and the accounts payable.) On June 4 the company will credit Cash, because cash was paid. The amount of the debit and credit is $300. Entering them in the general journal format, we have:
| Date | Account Name | Debit | Credit | |
| June 4, 2012 | ??? | 300 | ||
| Cash | 300 | |||
All that remains to be entered is the name of the account to be debited. Since this was the payment on an account payable, the debit should be Accounts Payable. (Because the purchase was already recorded in May, you cannot enter Purchases or Inventory again on June 4.)
To help you become comfortable with the debits and credits in accounting, memorize the following tip:
Whenever cash is received, the Cash account is debited (and another account is credited).
Whenever cash is paid out, the Cash account is credited (and another account is debited).
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