Debits and Credits (Word Scrambles with Coaching)

Liability accounts are decreased with a debit.

Example: When a company makes a payment on a loan, the liability account Notes Payable is debited, decreasing its normal credit balance. (And cash will be decreased with a credit.)

A credit will increase the balance in a revenue account.

Example: When a company earns $1,000 for performing a service, the Service Revenue account is credited, increasing its normal credit balance. (And Cash or Accounts Receivable will likely be debited.)

Credits are entered on the right side of a T-account.

Example: In the T-account for Accounts Payable, credit entries are recorded on the right side, thereby increasing the liability’s normal credit balance.

The accounting equation remains in balance due to double-entry bookkeeping or accounting.

Example: If a company pays $500 cash for rent, Cash is credited for $500 and Rent Expense is debited for $500. This keeps the accounting equation in balance because Cash (an asset account on the left side of the equation) is decreased, and rent expense decreases the owner’s equity, which is on the right side of the equation.

Debits are entered on the left side of a T-account.

Example: In the T-account for Cash, debit entries are recorded on the left side. Assets normally have their balances on the left side (the debit side).

Asset account balances are reduced by a credit entry.

Example: When a company uses up $200 of office supplies that were previously recorded in the asset account Supplies, the Supplies account is credited. This will reduce the Supplies account’s normal debit balance.

The accounting equation (Assets = Liabilities + Owner’s Equity) should always be in balance.

Example: If a company’s assets increase by $5,000, there must be another $5,000 change. For example, there could be an increase in liabilities, an increase in owner’s equity, or a decrease in another asset (or a combination of these).

The journal is the book of original entry.

Example: In a manual accounting system, transactions are written in the general journal (or in a specialized journal) before being posted to the accounts in the general ledger.

Revenues cause an increase in owner’s equity.

Example: When a company earns $2,000 of revenue, the credit to a revenue account causes owner’s equity to increase. At some point, the balances in the revenue accounts will be transferred/closed to the owner’s equity account.

Expenses cause owner’s equity to decrease.

Example: When a company incurs $500 of utility expense, the debit to the Utilities Expense account causes a decrease in owner’s equity. At some point, the balances in the expense accounts will be transferred/closed to the owner’s equity account.

A credit is the amount entered on the right side of a T-account.

Example: When a company earns $500 of revenue, a credit of $500 is entered on the right side of the Revenue T-account to increase the account’s normal balance. At some point, the credit balances in the revenue accounts will be transferred/closed to the owner’s equity account.

Expenses are income statement accounts with debit balances.

Example: Salaries Expense, Rent Expense, and Advertising Expense and all expense accounts normally have debit balances. These debit balances are increased with a debit entry.

Accounts Receivable is a balance sheet account with a debit balance.

Example: When a company earns revenue by providing a service on credit, a debit is made to Accounts Receivable, an asset account with a debit balance, to record the amount the customer owes. A credit entry will be made to a revenue account.

Accumulated Depreciation is a balance sheet contra-asset account. Contra-asset accounts will have credit balances.

Example: In each accounting period, an adjusting entry is made to debit Depreciation Expense and credit Accumulated Depreciation for the depreciation of the equipment used in the company’s business. (Rather than crediting the Equipment account, the contra-asset account Accumulated Depreciation is used.) Therefore, Accumulated Depreciation will have a credit balance, which is the opposite of most asset accounts.

The Retained Earnings account will be reduced with a debit entry. (Successful companies’ Retained Earnings accounts will have credit balances, a requirement for paying dividends.)

Example: When a corporation pays dividends to stockholders, Retained Earnings is debited to reduce this stockholders’ equity account’s credit balance.

Revenues are recorded in income statement accounts with credit balances. They have credit balances because revenues increase a sole properietorship’s owner’s equity or a corporation’s stockholder’s equity account Retained Earnings.

Example: Service Revenue, Sales Revenue, and Interest Revenue are all revenue accounts that normally have credit balances. As a result, their balances are increased with a credit entry.

A sole proprietor’s Drawing account will have a debit balance. This will reduce the owner’s capital account which normally has a credit balance.

Example: When a sole proprietor withdraws cash for personal use, the owner’s drawing account is debited, reducing owner’s equity and the Cash account will be credited.

Accounts Payable is a balance sheet liability account with a credit balance.

Example: When a company purchases inventory on credit, a credit is made to Accounts Payable, a liability account, to record the amount owed to the vendor. (The account Inventory or the account Purchases will be debited.)

A trial balance is an internal report to show that the general ledger’s debit balances add up to the same total as the credit balances.

Example: In a manual accounting system, a bookkeeper will prepare a trial balance listing all accounts and their balances to confirm that total debits equal total credits. If the trial balance shows that the total of the debit balances is equal to the total of the credit balances, the next step in the accounting process can be done.

The requirement that each journal entry needs to have at least one debit and one credit is known as double-entry bookkeeping or double-entry accounting.

Example: If a company pays $100 cash for an operating expense, the journal entry will include a debit to the expense account and a credit to Cash. In double-entry acounting and bookkeeping, every transaction will affect a minimum of two general ledger accounts. Further, the total of the debit amounts in each entry must be equal to the total of the credit amounts.