Here's a concise cheat sheet on Debits and Credits—the fundamental principles of accounting. This guide covers their meanings, how they impact different accounts, and common transactions. It also includes key rules and examples to help you understand the mechanics of double-entry bookkeeping.
Basic Concepts
What Are Debits and Credits?
- Debit (Dr): An entry that increases assets or expenses and decreases liabilities, revenue, or equity.
- Credit (Cr): An entry that decreases assets or expenses and increases liabilities, revenue, or equity.
- Every transaction affects at least two accounts (double-entry accounting).
The Accounting Equation
Assets =Liabilities + Equity
- Debits must always equal credits in every journal entry to keep the equation balanced.
Effects on Different Account Types
| Account Type | Increase (Dr/Cr) | Decrease (Dr/Cr) |
|---|---|---|
| Assets (e.g., Cash, Inventory, Equipment) | Debit (Dr) | Credit (Cr) |
| Liabilities (e.g., Loans, Payables) | Credit (Cr) | Debit (Dr) |
| Equity (e.g., Capital, Retained Earnings) | Credit (Cr) | Debit (Dr) |
| Revenue (e.g., Sales, Service Income) | Credit (Cr) | Debit (Dr) |
| Expenses (e.g., Rent, Salaries, Utilities) | Debit (Dr) | Credit (Cr) |
Common Journal Entry Examples
1. Recording a Sale (Cash Transaction)
- A company sells goods for $1,000 cash.
Dr Cash $1,000 Cr Sales Revenue $1,000
2. Purchasing Office Supplies on Credit
- Bought $200 worth of office supplies on account.
Dr Office Supplies Expense $200 Cr Accounts Payable $200
3. Paying Off a Liability
- Paid $500 towards a loan.
Dr Loan Payable $500 Cr Cash $500
4. Owner Investing in the Business
- The owner invests $5,000 in cash into the business.
Dr Cash $5,000 Cr Equity $5,000
5. Paying Rent Expense
- Rent of $800 is paid in cash.
Dr Rent Expense $800 Cr Cash $800
Tips and Sources
Useful Tips
- Use DEAD CLIC to remember increases:
- Debit increases Expenses, Assets, Dividends
- Credit increases Liabilities, Income (Revenue), Capital (Equity)
- Always ensure total debits = total credits in a transaction.
- Double-check classifications—some accounts (e.g., Contra Accounts) work oppositely.