As bookkeepers, it is essential that we understand Debits and Credits. This means we need to know which accounts are debit and which are credit and how they are affected by different transactions. For example, when we put money into an asset account such as a bank account, it is a debit to that account. When we take money from that same asset account it is a credit. When we make a payment on a liability it is a debit to that account, while an increase to amount owed for that liability account is a credit.
Debits and credits in double entry bookkeeping can be a difficult concept to grasp especially in the beginning. You might have heard that the total debits must equal total credits.
DEBITS = CREDITS
These are the two sides of the balance sheet. Just as the two sides of a scale balance when each side has an equal amount.
Debit Accounts are the asset accounts of the General Ledger.
Credit Accounts consist of the liability and capital (investment and earnings) accounts.
Therefore, just as debits must equal credits, so must assets equal the total of liabilities, capital and accruals.
ASSETS = LIABILITIES + CAPITAL + ACCRUALS
How debits and credits affect Debit Accounts
A debit to a debit (asset) account increase the amount of that account.
A credit to a debit (asset) account decreases the amount of that account.
How debits and credits affect Credit Accounts
A debit to a credit (liability & capital) account decreases the amount of that account.
A credit to a credit (liability & capital) account increases the amount of that account.
Another way to state the relationship between debits and credits is to say that assets are what we own and liabilities, accrual and capital accounts are the source of what we own. In simple terms, if we buy a computer for our business with a loan, that asset (computer) comes from the liability that loan becomes. That would result in a debit to our asset account and a credit to our liability account.