To increase the balance in an asset or expense account, you enter an amount as a debit. To decrease the balance in an asset or expense account, you enter an amount as a credit.
Liabilities, revenues, and stockholders' (owner's) equity accounts are increased with a credit. They are decreased with a debit.
Here are five examples to illustrate debits and credits:
- If a company borrows $5,000 from the bank, the company will debit Cash (because this asset increased) and will credit Notes Payable (because this liability increased).
- When a company collects $400 from its customers who were billed earlier, the company will debit Cash (because this asset is increased) and will credit Accounts Receivable (because this asset decreased).
- If a company bills a client for a service, the company will debit Accounts Receivable (because this asset increased) and will credit Service Revenues (because revenues increased and that in turn increases owner's equity).
- When a company pays $600 for the current month's rent, the company will debit Rent Expense (because expenses increased and that in turn decreases owner's equity) and will credit Cash (because this asset decreased).
- If J. Smith, a sole proprietor, withdraws $300 from the business for personal use, the business will debit the account J. Smith, Drawing (because owner's equity decreased) and will credit Cash (because the asset decreased).
Periodically, a trial balance is prepared to prove that the total of the debit balances in the accounts is equal to the total of the credit balances in the accounts.
