Debits and Credits (Explanation)

T-accounts

Accountants and bookkeepers often use TACCOUNTS as a visual aid for seeing the effect of the debit and credit on the two (or more) accounts. (Learn more about accountants and bookkeepers in our Accounting Career Center.)

We will begin with two T-accounts: Cash and Notes PAYABLE.

Let's demonstrate the use of these T-accounts with two transactions:

1. On June 1, 2014 a company borrows 5,000 from its bank. This causes the company's asset Cash to increase by 5,000 and its liability Notes Payable to also increase by 5,000. To increase the asset Cash theACCOUNT needs to be debited. To increase the company's liability Notes Payable this account needs to be credited. After entering the debits and credits the T-accounts look like this:

2. On June 2, 2014 the company repaid  2,000 of the bank loan. This causes the company's asset Cash to decrease by $2,000 and its liability Notes Payable to also decrease by  2,000. To reduce the asset Cash theACCOUNT will need to be credited for $2,000. To decrease the liability Notes Payable that account will need to be debited. The T-accounts now look like this:

Journal Entries

Another way to visualize business transactions is to write a generalJOURNAL ENTRY. Eachgeneral journal entry lists the date, theACCOUNT title(s) to be debited and the corresponding amount(s) followed by theACCOUNT title(s) to be credited and the corresponding amount(s). TheACCOUNTS to be credited are indented. Let's illustrate the general journal entries for the two transactions that were shown in the T-accounts above.

When Cash Is Debited and Credited

BecauseCASH is involved in many transactions, it is helpful to memorize the following:

• Whenever cash is received, DEBIT Cash.
• Whenever cash is paid out, credit Cash.

With the knowledge of what happens to the Cash account, the journal entry to record the debits and credits is easier. Let's assume that a company receives 500 on June 3, 2014 from a customer who was given 30 days in which to pay. (In May the company recorded the sale and an accounts receivable.) On June 3 the company will debit Cash, because cash was received. The amount of the debit and the credit is $500. Entering this information in the general journal format, we have:

All that remains to be entered is the name of theACCOUNT to be credited. Since this was the collection of anACCOUNT receivable, the credit should be Accounts Receivable. (Because the sale was already recorded in May, you cannot enter Sales again on June 3.)

On June 4 the company paid $300 to a supplier for merchandise the company received in May. (In May the company recorded the purchase and theACCOUNTS payable.) On June 4 the company will credit Cash, because cash was paid. The amount of the debit and credit is  300. Entering them in the general journal format, we have:

All that remains to be entered is the name of theACCOUNT to be debited. Since this was the payment on anACCOUNT payable, the debit should be Accounts Payable. (Because the purchase was already recorded in May, you cannot enter Purchases or Inventory again on June 4.)

To help you become comfortable with the debits and credits inACCOUNTING, memorize the following tip:

Here's a Tip

Whenever cash is received, the Cash account isdebited (and another account is credited).

Whenever cash is paid out, the Cash account is CREDITED (and another account is debited).