Debits and credits

Debit means left, credit means right

A debit is an entry on the left side of an account. A credit is an entry on the right side. That's all the words mean.

Debit doesn't mean money in. Credit doesn't mean money out. Whether a debit makes an account go up or down depends on the account type.

The golden rule: in every entry, total debits must equal total credits.

DC DEALER: the cheat sheet

Remember DC DEALER from lesson 1.4: Debit, Credit, then Draw, Equity, Asset, Liability, Expense, Revenue. Draw a T and put each pair across it: Asset, Draw and Expense on the debit side, Liability, Equity and Revenue on the credit side.

To increase an account, use its own side of the T. Cash goes up with a debit. Accounts Payable goes up with a credit.

To decrease it, flip to the other side. Cash goes down with a credit. Accounts Payable goes down with a debit.

Keep it handy. For every entry, find each account on the T, decide if it goes up or down, and you have your debit and your credit.

The rules table

The same rules as a table, with the two contra types added.

T-accounts: a quick sketch

A T-account is a simple drawing of one account. Debits go on the left of the T. Credits go on the right.

Here is 1000 Business Checking for a few days. Cash is an asset, so debits add and credits subtract.

Use the T for every entry

Here's the method. Use it for every transaction until it's automatic:

• What happened? Say it in plain words.
• Which accounts? Name each account and find its type on the T: Asset, Liability, Equity, Draw, Expense or Revenue.
• Increasing or decreasing? Press + or −. Increasing keeps the account on its own side. Decreasing flips it to the other side.
• Read off the side. Debit or credit.
• Write the entry with the amounts, and check that total debits equal total credits.
• Record it in Leah Books and find it in the ledger.

Example 1: The owner puts money in

Jen Alvarez, the owner, puts $5,000 of her own money into the business checking account.

Two accounts change. Business Checking is an asset, and it's increasing: press +, and Asset sits on the debit side. Owner's Investment is equity, and it's increasing too: Equity sits on the credit side.

Debit $5,000, credit $5,000. Debits equal credits.

Example 2: Buy supplies with cash

Evergreen buys $180 of mulch and fertilizer from Pacific Nursery Supply and pays right away from Business Checking.

Plants & Materials is an expense (a cost of the jobs), and it's increasing: +, Expense is on the debit side. Business Checking is an asset, and it's decreasing: press − and Asset flips to the credit side.

Example 3: Buy equipment on credit

Evergreen buys a $1,500 leaf blower and hedge trimmer from Westside Equipment Rental. The bill is due in 30 days, so no cash moves yet.

Equipment is an asset, and it's increasing: +, debit. Accounts Payable, what the business owes, is a liability, and it's increasing: +, Liability is on the credit side.

Example 4: Pay that bill

Thirty days later, Evergreen pays the $1,500 bill from Business Checking.

Example 5: A purchase on the business credit card

A crew fills up a truck for $60 at Cascade Fuel Co. with the business credit card.

Fuel is an expense, increasing: +, debit. Business Credit Card is a liability (the business owes the card company), increasing: +, credit.

A credit here means the business owes more. It doesn't mean money came in.

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