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Debits and Credits – Simple Definition & Examples

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Debits and Credits in Simple Words

Debits and Credits are increases/decreases in an account balance

Debiting and crediting an account can either increase or decrease the account’s balance, depending on the type of account.

Debits and Credits: Increase or Decrease?

If the account is an:

  • Asset account, representing what you own, then debit = increase, and credit = decrease.
    • The normal balance of Asset accounts is debit.

Let’s use a debit card as an example. A debit card links to your bank account with money; therefore, it’s considered an asset of yours. The more debit (cards) you have, the richer you appear. Therefore, if it’s an asset account, debit means more/increase, and credit means less/decrease.


 

If the account is a:

  • Liability account, representing what you owe, like your credit card, then debit = decrease, and credit = increase
    • The normal balance of Liability accounts is credit.

Use a credit card as an example. Most credit cards have a balance to pay; therefore, it is a liability. The more credit card balances you have, the more debt you will have to pay. As a result, if it’s a liability account, credit means more/increase, and debit means less/decrease.


 

If the account is an:

  • Equity account, which is asset minus liability (or what you own minus what you owe), then debit = decrease, and credit = increase
    • The normal balance of Equity accounts is credit, the same as liability.

Unfortunately, there isn’t a simple analog for equity accounts. But if you remember the balance sheet equation (Assets = Liability + Equity, or A=L+E), you can see liability and equity are neighbors. Therefore, equity accounts follow the same direction as liability.


 

If the account is a:

  • Revenue account, representing how much you earned, then debit = decrease, and credit = increase
    • The normal balance of Revenue accounts is credit

Let’s use online shopping as an example. Some online shops offer credits (or points) for every dollar you spend on their products. In other words, the more credits you have in your account, the more you have earned on their website, and you can use those credits to save big on your next purchase. As a result, if it’s a revenue account, credit means more/increase, and debit means less/decrease.


 

If the account is an:

  • Expense account, representing how much you spent, then debit = increase, and credit = decrease
    • The normal balance of Expense accounts is debit

Continue with the online shop credits example mentioned above; once I spend those credits on a purchase, they will be deducted or “debited” from my account. In other words, debit is just the opposite of credit. As a result, if it’s an expense account, then debit means more/increase, and credit means less/decrease.

Cheat Sheets of Debits and Credits

  • Does debit or credit mean an increase or decrease in an account? see below

  • The normal balance of an account is the same as when the account is increased. For instance, when debit means an increase in an asset account, the normal balance for the asset account is debit. Similarly, if credit means an increase in a liability account, then the normal balance for the liability account is credit.

Debits and Credits Simple Example

Pho My Life Noodle Shop made $1,000 dollars today by selling delicious food. Below is an example of journal entries using debits and credits 

Every journal entry must contain two lines per the double-entry principle (one debit and one credit)

Line 1: Record Cash receipt of $1,000. Cash is an asset account, and to increase the cash account, we will have to debit it for $1,000. 

Line 2: Record Food Revenue of $1,000. For revenue accounts, credit means an increase; therefore, crediting the revenue account for $1,000 means an additional $1,000 in revenue has been earned. 

Debits and Credits are a critical component of every journal entry. We present more journal entries examples here, all in a simple and easy-to-understand way.

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