Two related terms are “equity” and “liability. " Equity is what is left over after subtracting all assets, and liability is how much is owed to other parties. [3] X Expert Source Ara Oghoorian, CPACertified Financial Planner & Accountant Expert Interview. 11 March 2020. In accounting, the debit column is on the left of an accounting entry, while credits are on the right. [4] X Research source Debits increase asset or expense accounts and decrease liability or equity. Credits do the opposite — decrease assets and expenses and increase liability and equity. [5] X Research source To make sense of this, take a look at the basic accounting equation, which is Assets = Equity + Liabilities. Assets are paid for by equity and/or liability —you cannot have one without the other. [6] X Research source So if you complete a transaction that increases assets (and you debit the asset account), you must also increase the equity or liability (by crediting the equity or liability account) so that Assets remain equal to Equity and/or Liability. [7] X Research source
Generally, these types of accounts are increased with a debit: Dividends, Expenses, Assets, Losses (DEAL). [8] X Research source Generally, these types of accounts are increased with a credit: Gains, Income, Revenues, Liabilities, Stockholders’ Equity (GIRLS). [9] X Research source
For example, if you pay down your Accounts Payable account (a liability) with $20,000 in cash (an asset), you’ll need to adjust both accounts. In that case, you’ll credit Cash for $20,000. That will reduce your cash amount by $20,000. To keep your books in balance, you’ll need to debit Accounts Payable by $20,000. That will likewise reduce your Accounts Payable amount by $20,000.
Place the debit balance on the left and the credit balance on the right. Remember that debit accounts have debit balances and credit accounts have credit balances.
If the transaction increases a debit account, record a debit entry in that debit account, and simultaneously a credit entry in an appropriate credit account. Continuing with our example, you would debit Accounts Receivables $4,000, then credit Surplus with a corresponding $4,000. If the transaction decreases a debit account, record a credit entry in that debit account, and simultaneously a debit entry in an appropriate credit account. The cost of goods sold of $2,800 decreases the inventory, and is therefore a credit entry. It will have a corresponding $2,800 debit entry from Surplus. The $500 expenses paid in cash decreases the debit account Cash, so you would enter $500 credit in the Cash account. It will have a corresponding $500 debit entry from Surplus.
