Debit and credit accounting is a formal bookkeeping and accounting terms. It explains that in every accounting transaction there are two sides to each individual transaction – a debit and an equal and opposite credit. This ensures that the Balance sheet formula Assets = Debt + Liabilities. Accounting is best learned through examples. In this article I will primarily focus on debit/credit accounting through examples:
Below, is a list of certain transactions and how they relate to debit and credit accounting:
1. Revenue = Credit
2. Expense = Debit
3. Increase in Assets = Debit
4. Increase in Equity = Credit
5. Increase in Liabilities = Credit
Below are some examples of this two side accounting system:
1. The sale of $10 of goods in cash
Debit ($10) Cash (Assets)
Credit ($10) Sales (Revenue)
2. The Sale of $10 of goods on credit
Debit ($10) Accounts receivable (Assets)
Credit ($10) Sales (Revenue)
3. The Sale of $20 of goods. $10 is paid in cash, $10 is paid on credit
Debit ($10) Cash (Assets)
Debit ($10) Accounts receivable (Assets)
Credit ($20) Sales (Revenue)
4. Borrowing $1,000,000 to purchase Plant for $1,000,000
Debit ($1,000,000) Plant (Asset)
Credit ($1,000,000) Borrowings (Liabilities)
5. Paying a dividend of $50,000
Debit ($50,000) Retained Earnings
Credit ($50,000) Cash