Debit and Credit

Debit and Credit

Let's do this

Here's a tip

• Debit means left

• Credit means right

increased with a debit:

• Dividends (Draws)

• Expenses

• Assets

• Losses

  
  
  

•  D - E - A - L when recalling the accounts that are increased with a debit.

increased with a credit

• Gains

• Income

• Revenues

• Liabilities

• Stockholders' (Owner's) Equity

• You might think of G - I - R - L - S when recalling the accounts that are increased with a credit.

Definition of Terms

• Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right.

• A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an accounting entry.

• A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.

This is the T- Account. It will be easier to visualize it this way.

Let's break it down. This is cash.

Liability. This example is for Notes Payable.

Let's try an example

XYZ company borrows $5,000 from its bank with a promise to pay.

Let us first identify the value received and value parted with.

Answer:

• Value Received is Cash

• Value Parted with is Freedom from Obligation or Debt.

• Now that we identified those let's change it to the appropriate account title. 

Value Received: Cash

Cash is already an Account Title so no need to change.

Value Parted With: Notes Payable

Freedom from debt can be Accounts Payable or Notes Payable. On the example given, remember there was the phrase "promise to pay" which is an indicator of a Notes Payable.

What's Next?

Let us then see if the both value increases or decreases.

Cash

Did it increase or decrease?

Cash: Inreased

XYZ company's cash increases because they borrowed money from the bank.

Notes Payable: Increased

Notes Payable increased becuase of the loan incurred from the bank.

Is that it?

No, you need to classify the account titles if they are Asset, Liability, Capital, Income or Expense.

Let's do that

• Cash is an Asset (Increased)

• Notes Payable is a Liability (Increased)

• After that, go back to the T-Accounts and see if which account is under debit and which account is under credit.

Asset: Increased ; Liability Increased

If the company received cash it is a debit. If the company paid using cash then cash will be credited.

If the company borrowed it will increase its liability (credit); if the liability is paid (repay loan) therefore decreasing liability it will reflect on the debit side.

Cash received was placed on the debit side.

Notes Payable incurred was placed on the credit side.

Let's try one more: XYZ Company repays $2,000 of the bank loan.

• Remember the steps:

• Identify the Value Received and the Value Parted with.

• Change it to the appropriate account title. 

• See if the both value (account title) increases or decreases.

• Classify the account titles if they are Asset, Liability, Capital, Income or Expense.

• Check T-Accounts and see if which account is under debit and which account is under credit.

Transaction: XYZ Company repays $2,000 of the bank loan.

• Identify the value received and value parted with

• value received: partial freedom from debt or obligation

• value parted with: cash (whenever you see "paid" it means that someone has parted with cash or money)

Transaction: XYZ Company repays $2,000 of the bank loan.

• Change it to the appropriate account title. 

• value received: (Notes Payable) partial freedom from debt or obligation

• value parted with: Cash (Cash is already an Account Title)

Transaction: XYZ Company repays $2,000 of the bank loan.

• See if the both value (account title) increases or decreases.

• Notes Payable: decrease (due to partial payment of debt)

• Cash: decrease (cash was used to pay for the debt)

Transaction: XYZ Company repays $2,000 of the bank loan.

• Classify the account titles if they are Asset, Liability, Capital, Income or Expense.

• Notes Payable: Liability (decrease)

• Cash: Asset (decrease)

Transaction: XYZ Company repays $2,000 of the bank loan.

• Check T-Accounts and see if which account is under debit and which account is under credit.

• Notes Payable: Liability (decrease) :Debit

• Cash: Asset (decrease) : Credit

Transaction: XYZ Company repays $2,000 of the bank loan.

• Final Answer:

• Notes Payable: Debit

• Cash: Credit

Practice Time!!!

Identify what account to be debited or credited. Use small letters only. Separate the account title and amount using a comma ( , ). No need to use $ for the meantime. No need to use .00 for centavos for the meantime.