In double entry accounting, for
every debit there must be an offsetting credit. One helpful tool
to understanding debits and credits might be to think in terms of
the left and right side of the accounting equation. The left side
represents the assets of the company and the right side represents
the claims on those assets; i.e., liabilities and owners' equity.
Generally, anything that increases the left side or decreases the
right side would be considered a debit and anything that increases
the right side or decreases the left would be considered a credit.
As previously illustrated, revenues and expenses may also be
thought of in terms of the accounting equation. Since owners'
equity is a claim on assets, it would therefore fall on the right-hand
side of the equation. Revenues would be considered credits because,
in essence, they would eventually tend to increase ownership in
the business. Expenses would take away from the ownership and
so they would fall on the left-hand side of the equation.
This "leftright" notion carries through into journal
entries where the debit is recorded on the left side of the transaction
and credits are recorded on the right. An example of this "leftright"
thinking may be constructed using an example where a $500 materials
expense which was charged on a trade account is to be recorded.
The expense would eventually decrease ownership in the company when
it is paid. It therefore would impact on the left side of the accounting
equation, so it would be a debit.
The charging of the materials would be an increase in a liability
(accounts payable). That increases the claims on the company,
so it would be considered a credit. The journal entry to record
this transaction would be:
Note that the debit appears first and the dollar amount appears
on the left side of the journal entry. The credit is listed second
and appears on the right-hand side.