Definition of Debits and Credits
Debits and credits are terms used in accounting and bookkeeping systems for the past five centuries. They are part of the double entry system which results in every business transaction affecting at least two accounts. At least one of the accounts will receive a debit entry and at least one other account will receive a credit entry. Further, the amounts entered as debits must be equal to the amounts entered as credits.
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:
- Expense accounts generally have debit entries and have debit balances
- Revenue accounts generally have credit entries and have credit balances
- Assets generally have both debit and credit entries, but usually have debit balances
- Liabilities generally have debit and credit entries, but usually have credit balances
- Stockholders' equity accounts could have debit and credit entries, but profitable corporations usually have credit balances
Examples of Debits and Credits
To illustrate, let's assume that a company borrows $10,000 from its bank. The company will enter $10,000 as a debit in its Cash account and a credit of $10,000 in its Notes Payable account.
If the company pays $300 for an ad to air on the radio, the company will enter $300 as a debit in the Advertising Expense account and will enter $300 as a credit in its Cash account.