There is no standard definition for the terms debit and credit.

Historically, the word “debit” derives from the Latin word debere, which means “to owe.” In accounting, this has been shortened to “Dr.”

Similarly, the word “credit” has its historical roots in the Latin word credere, meaning “to believe.” In accounting, this is often abbreviated as “Cr.”

In spite of all the discussion surrounding these terms, we can also say that they are the fundamental operators of accounting, which underpin the subject.

Debit and credit represent two sides (columns) of an account (i.e., a Debit column and a Credit column). Debit (Dr.) involves making an entry on the left side and Credit (Cr.) involves making an entry on the right side.

Today, accountants adopt practices like the use of these columns to keep records that are used on a long-term basis. They are also useful for the management in promoting effective decision-making.

Rules of Debit and Credit

Debit and credit are financial transactions that increase or decrease the values of various individual accounts in the ledger. The following rules of debit and credit are applied to record these increases or decreases in individual ledger accounts.

Rules for Asset Accounts

Assets are recorded on the debit side of the account. Any increase to an asset is recorded on the debit side and any decrease is recorded on the credit side of its account.

For example, the amount of cash in hand on the first day of the accounting period is recorded on the debit side of the cash in hand account. Whenever an amount of cash is received, an entry is made on the debit side of the cash in hand account.

Whenever an amount of cash is paid out, an entry is made on the credit side of the cash in hand account.

Rules for Liability Accounts

Liabilities are recorded on the credit side of the liability accounts. Any increase in liability is recorded on the credit side and any decrease is recorded on the debit side of a liability account.

For example, the amount payable to United Traders on the first day of the accounting period is recorded on the credit side of the United Traders Account.

If more goods are bought from United Traders (thereby incurring an additional liability to United Traders), an entry would be made on the credit side of United Traders Account.

If an amount is paid to United Traders (thereby reducing the liability to United Traders), an entry is made on the debit side of United Traders Account.

Rules for Capital Accounts

Capital is recorded on the credit side of an account. Any increase is also recorded on the credit side. Any decrease is recorded on the debit side of the respective capital account.

For example, the amount of capital of Mr. John on the first day of the accounting period will be shown on the credit side of John’s Capital Account.

If he introduces any additional capital, an entry will be made on the credit side of his capital account. If he takes any money or goods from the business for his personal use, that will reduce his capital and therefore an entry will be made on the debit side of his account.

Notice that the rules of debit and credit for asset accounts are exactly the opposite of the rules of debit and credit for liability and capital accounts.

Rules for Expense Accounts

An expense is a loss and therefore results in a reduction in capital. Since a reduction in capital is recorded on the debit side of an account, all expenses are also recorded on the debit side of the relevant account.

Hence, when salaries is paid to workers, we make an entry on the debit side of the salaries account. Usually, but not always, no entries are made on the credit side of the accounts kept for expenses.

Rules for Income or Revenue Accounts

An income or revenue results in an increase in capital. Since increases in capital are recorded on the credit side of the capital account, all incomes are also recorded on the credit side of the relevant account.

Hence, when receiving funds from any business activity, we make an entry on the credit side of the relevant income or revenue account. Usually, but not always, there will be no entries made on the debit side of the accounts kept for income and revenue.

Summary

We can now summarize the rules of debit and credit for various ledger accounts as follows:
Rules of Debit and Credit

Example

Mr. John made the following transactions during January 2016:

  • January 04: Received cash $1,350 from Sam (a debtor)
  • January 10: Bought a new delivery van for $6,000 from Deluxe Motors Inc. on credit
  • January 15: Paid cash $1,520 to United Traders (a creditor)
  • January 21: Mr. John introduced an additional capital of $1,400

Required: How would the rules of debit and credit be applied to record the above transactions in ledger accounts?

Solution

Receipt of cash from Mr. Sam, a debtor

  1. An increase in cash (an asset); must be recorded on the debit side of the cash account
  2. A decrease in the amount due from Mr. Sam (an asset); must be recorded on the credit side of Mr. Sam’s account

Purchase of new delivery van from Deluxe Motors Inc.

  1. An increase in delivery van (an asset); must be recorded on the debit side of the delivery van account
  2. An increase in the amount payable to Deluxe Motors (a liability); must be recorded on the credit side of the Deluxe Motors account

Payment of cash to United Traders

  1. A decrease in the amount payable to United Traders (a liability); must be recorded on the credit side of the United Traders account
  2. A decrease in cash (an asset); must be recorded on the credit side of the cash account

Cash taken by John for his personal use

  1. An increase in John’s capital; must be recorded on the credit side of John’s capital account
  2. An increase in cash (an asset); must be recorded on the debit side of the cash account

Learn the Basics

Mastering the rules of debit and credit is foundational to every accounting process. Finance Strategists connects you to a trusted financial advisor in New Orleans, LA for all the help you may need. For a list of other areas we cover, see our financial advisor page.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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