Debits and credits are terms used in accounting and bookkeeping (and have been used for centuries). They are a key part of the double entry system, which means that every business transaction will affect a minimum of two accounts. One of the accounts will receive a debit entry and another account will receive a credit entry. The amounts entered as debits must be equal to the amounts entered as credits.
To illustrate, let's assume that a company borrows $10,000 from its bank. The company will record a debit of $10,000 in its Cash account, and a credit of $10,000 in its Notes Payable account. A cash sale of $300 will be recorded with a debit of $300 in the Cash account and a credit of $300 in the Sales account.
You should think of a debit as an entry on the left side of an account, and a credit as an entry on the right side of another account. Accountants often use T-accounts to visualize the debit and credit effects on the accounts' balances.
It may take some time to learn which general ledger accounts will be debited and credited, but here are some general rules:
- expenses will have debit entries and will have debit balancs
- revenues will have credit entries and will have credit balances
- assets will have debit and credit entries, but will usually have debit balances
- liabilities will have debit and credit entries, but will usually have credit balances
- stockholders' equity accounts could have debit and credit entries, but the combined total for profitable corporations will be a credit