Hello and welcome to my blog. Today, we are going to talk about the concepts of debit and credit in accounting. I will tackle the confusion about debits and credits and give you a mnemonic, so you get used to remembering what to debit and credit when an accounting transaction is consummated.
Don’t we all love getting credit alerts from our personal bankers? Often, we smile because a credit alert from the bank notifies us that money has been added to our bank account. When we spend money from the bank account, we get debit alerts from the bank, which means the money in our bank account has been reduced. If we understand this banking transaction dynamics, where is the confusion?
The confusion seems to stem from the fact that banks’ debit and credit alerts are based on the bank’s point of view. Context is important, it is about taking note of the entity that owns the books of accounting being kept. Banks’ debit and credit alerts mean money-out and money-in respectively, from the perspective of the bank. From the perspective of the bank’s customer, the accounting entries for money-in and money-out would be the opposite. Accountants use debits and credits to denote addition and subtraction.
Revisio.com defined debit as an expense, or money paid out from an account, that results in the increase of an asset or a decrease in a liability or owner’s equity. Using a T-account (a bookkeeping table), debit is an entry on the left side that represents the addition of an asset or expense or the reduction to a liability, income, or equity.
A credit entry indicates that a transaction resulting in an income, liability, or equity has occurred. In T-account, credit is an entry on the right side that represents the addition of income, liability, or equity or a reduction to an asset or expense.
Debits and credits are kept in separate columns allowing for each to be recorded independently from the other to minimize mistakes. Hence the opposite of a debit is a credit.
Using the DEALER Method
Some accountants use the acronym “DEALER” to remember the debit and credit convention.
DEA represents account types to debit when the transaction will cause an increase in the account balance. A credit entry to these account types will cause a decrease in account balance.
D = Dividend payable
E = Expenses
A = Assets
LER represents account types to increase when the business transaction will cause an increase in the account balance. Note that a debit entry to these account types will cause a decrease in account balance.
L = Liabilities
E = Owner’s equity
R = Revenue
The Double Entry Principle
The double entry principle of accounting requires a corresponding credit entry for every debit entry. For instance, if a business makes a cash sale of
N500,000, the following book keeping entries will ensue.
|SN||Accounting Transaction||Account Type||Impact||Debit||Credit|
The advancement in technology has simplified bookkeeping and accounting. The market has a plethora of software that handles addition and subtraction once the transactional data are recorded.