Debits and Credits

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. We will begin with two T-accounts: Cash and Notes Payable.

Cash (asset account)

Debit Increases an asset Received $				Credit Decreases an asset Paid $

Notes Payable (liability account)

Debit Decreases a liability Repaid loan				Credit Increases a liability Borrowed more

Let's demonstrate the use of these T-accounts with two transactions:

1. On June 1, 2007 a company borrows $5,000 from its bank. This causes the company's asset Cash to increase by $5,000 and its liability Notes Payable to also increase by $5,000. To increase the asset Cash the account needs to be debited. To increase the company's liability Notes Payable this account needs to be credited. After entering the debits and credits the T-accounts look like this:

Cash (asset account)

Debit Increases an asset Received $				Credit Decreases an asset Paid $
June 1, 2007 ENTRY	5,000

Notes Payable (liability account)

Debit Decreases a liability Repaid loan				Credit Increases a liability Borrowed more
				5,000		ENTRY June 1, 2007

2. On June 2, 2007 the company repaid $2,000 of the bank loan. This causes the company's asset Cash to decrease by $2,000 and its liability Notes Payable to also decrease by $2,000. To reduce the asset Cash the account will need to be credited for $2,000. To decrease the liability Notes Payable that account will need to be debited. The T-accounts now look like this:

Cash (asset account)

Debit Increases an asset Received $				Credit Decreases an asset Paid $
June 1, 2007 ENTRY	5,000
				2,000		ENTRY June 2, 2007
June 2, 2007 BALANCE	3,000

Notes Payable (liability account)

Debit Decreases a liability Repaid loan				Credit Increases a liability Borrowed more
				5,000		ENTRY June 1, 2007
June 2, 2007 ENTRY	2,000
				3,000		BALANCE June 2, 2007

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, 2007	Cash		5,000
		Notes Payable		5,000

Date	Account Name		Debit	Credit
June 2, 2007	Notes Payable		2,000
		Cash		2,000

Because cash is involved in many transactions, it is helpful to memorize the following:

• Whenever cash is received, debit Cash.
• Whenever cash is paid out, credit Cash.

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, 2007 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, 2007	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, 2007	???		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).

  Part 1    Part 2    Part 3    Part 4        To Top