The Complete Guide to Account Rules Debit and Credit

Understanding account rules debit and credit can be a bit confusing, but it's actually quite straightforward once you get the hang of it. The key is to remember that debit and credit entries are like two sides of the same coin.

A debit entry increases an asset account or decreases a liability account, which means it's essentially a deposit into your account. For example, if you deposit $100 into your checking account, the debit entry would be $100.

Accounting basics are the foundation of understanding debit and credit transactions. There are five fundamental elements within accounting: Assets, Liabilities, Equity (or Capital), Income (or Revenue), and Expenses.

A credit transaction does not always indicate a positive value or increase in a transaction, and similarly, a debit does not always indicate a negative value or decrease in a transaction. An asset account is often referred to as a "debit account" due to the account's standard increasing attribute on the debit side.

Assets are increased with a debit, and decreased with a credit. Liability accounts are increased with a credit and decreased with a debit. Equity accounts are also increased with a credit and decreased with a debit.

Accountants close out accounts at the end of each accounting period, a method known as the traditional approach. This approach helps maintain accurate records and ensures that financial statements accurately reflect the company's financial position.

Debit and credit are fundamental concepts in accounting, and understanding their meanings is essential for navigating financial statements.

Debit refers to the left side of a transaction, while credit refers to the right side. This is because the terms originated from the Latin words "debere" or "debitum", which mean "what is due", and "credere" or "creditum", which mean "something entrusted or loaned." In accounting, debit is abbreviated as "Dr." and credit as "Cr."

Debit is often associated with assets, which are recorded on the left side of asset accounts. Conversely, credit is associated with liabilities and shareholder's equity, which are recorded on the right side. This is because assets are typically shown on the left side of the accounting equation (A=L+SE), and increases in liabilities and shareholder's equity are recorded on the right side to maintain the balance of the equation.

Here's a quick reference to the normal balance of each account type:

Accounting is often referred to as the language of business, and understanding Debits and Credits is essential to speaking this language.

The words Debit and Credit can be confusing because they depend on the point of view from which a transaction is observed. In accounting terms, assets are recorded on the left side (debit) of asset accounts.

Debits are often shortened to 'Dr' and Credits are shortened to 'Cr' - the reason for these abbreviations is unclear, but it's thought to come from the Latin words debere (to owe) and credere (to entrust).

Everything must balance in accounting, and this balance is maintained by recording Debits and Credits equally affected by any given transaction.

Here are the basic elements of financial statements that are affected by Debits and Credits:

The terms can sometimes be confusing because they depend on the point of view from which a transaction is observed. Assets are recorded on the left side (debit) of asset accounts, because they are typically shown on the left side of the accounting equation (A=L+SE). Conversely, an increase in liabilities and shareholder's equity are recorded on the right side (credit) of those accounts.

In accounting, assets are typically shown on the left side of the accounting equation, which means they are recorded as debits. Liabilities and equity, on the other hand, are recorded on the right side, which means they are recorded as credits.

A good way to remember the DEAL/CLIP mnemonic is to associate it with the definitions of the elements of financial statements. DEAL/CLIP provides an easy way to remember whether a nominal ledger account is naturally Debit or Credit.

Here's a quick summary of the normal balances for each account type:

Understanding normal balances is crucial for recording transactions correctly. If an account produces a balance that is contrary to what the expected normal balance of that account is, it has an abnormal balance.

A transaction's dual effect means that Debits and Credits will both be equally affected. In other words, everything must balance! This is a fundamental feature of accounting.

Debit cards and credit cards are creative terms used by the banking industry to market and identify each card.

From the cardholder's perspective, a debit card account normally contains a debit balance, and a credit card account normally contains a credit balance.

You can use a debit card to make a purchase with your own money, while a credit card allows you to borrow money to make a purchase.

The bank views a debit card as a liability, meaning the payment causes a decrease in the amount owed to the cardholder.

A credit card, on the other hand, is seen as an asset by the bank, as the payment increases the amount the bank is owed by the cardholder.

Using a debit card or credit card causes a debit to the cardholder's account, regardless of the card type, when viewed from the bank's perspective.

A contra account is a special type of account that has a balance that is the opposite of the normal balance for that section of the general ledger.

It's used to offset certain asset, liability, or equity accounts, such as accumulated depreciation against equipment or allowance for bad debts against accounts receivable. For example, when a vehicle is purchased using cash, the asset account "Vehicles" is debited and simultaneously the asset account "Bank or Cash" is credited.

Contra accounts can have negative balances, which can be confusing, but they're actually just a way to show the opposite of the normal balance. In the case of accumulated depreciation, it's a contra asset account that shows the total amount of depreciation that has been taken on an asset.

Here's a list of some common contra accounts:

Contra accounts can be useful for providing more accurate information about the value of certain assets or revenues. By netting the contras against the original account, you can get a more accurate picture of the actual value.