Debits and Credits

Definition

Debits are entries made on the left side of an account and credits are entries made on the right side. Debits and credits are not inherently good or bad: whether they raise or lower a balance depends entirely on the type of account they touch. Together they enforce the accounting equation by requiring that the total of debits equal the total of credits in every journal entry.

Key rules

• A single journal entry can have more than two lines, but total debits must still equal total credits.
• Contra accounts (for example, accumulated depreciation or contra revenue) follow the opposite rule of their parent account.
• The words "debit" and "credit" have no connection to bank statement language. A bank treats your deposit as a credit because, from the bank's perspective, your balance is a liability to them.

Example

The corporation invoices a client for $5,000 plus 5% GST on account. Two weeks later the client pays in full.

At invoice date
Debit:  Accounts Receivable (Asset)   $5,250
Credit: Consulting Revenue (Revenue)  $5,000
Credit: GST Payable (Liability)       $   250

At payment date
Debit:  Cash (Asset)                  $5,250
Credit: Accounts Receivable (Asset)   $5,250

Each entry has equal debits and credits, so the accounting equation stays in balance.

Common mistakes

• Assuming a debit always means "money out" because of personal banking vocabulary.
• Reversing the entry for customer prepayments. Cash received before revenue is earned is a liability (unearned revenue), not revenue.
• Debiting expense when the corporation pays down a credit card. The expense was recorded when the card was originally used; the payment is a decrease to cash and to the accounts payable or credit card liability.
• Putting depreciation on the wrong side of the contra-asset account.
• Recording a shareholder dividend as a debit to an expense account. Dividends debit retained earnings (or a dividends declared account that closes to retained earnings).

Related concepts

Debits and credits always operate within a specific account type, so mastering normal balances removes most of the guesswork. Each pair is captured in a journal entry and posted to the general ledger. At period end, the list of account balances is summarized in a trial balance to prove that debits still equal credits.