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Debit and Credit

Debit and Credit

Author: Evan McLaughlin
Description:
In this lesson, the student will learn about debits and credits.
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Tutorial

"Debit and Credit"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

Video Transcription

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Hey everyone. Welcome to our video today, Debit and Credit. So what are we going to cover today? We're going to cover debits and credits. We're going to talk about what those mean, what does debit mean, and what does credit mean, and how they apply to our account groups, our assets, our liabilities, our owner's equity, as well as the specific accounts within those account groups.

But before we talk about debits and credits, I think it's important that we set the stage with the basic accounting equation. So what is the basic accounting equation? Well, that is assets, we have our liabilities, and owner's equity. So the basic accounting equation is assets equal our liabilities plus owner's equity. It's important to understand this basic accounting equation.

And one thing to note is this must always balance. And I emphasize always. It's important to keep in the back of your mind while we go on to discuss debits and credits. So remember our assets must always equal our liabilities plus owner's equity. This is important when we're looking at the different debits and credits within the accounts and making sure that this equation is always in balance.

OK. So now let's start talking about our debits and credits, starting with debits. So what is a debit? Well, that's an entry that's made on the left side of an account. So think of debits, left side.

Now credits, what is a credit? A credit is an entry made on the right side of an account. So debits are on the left and credits are on the right.

Now, why do we use debits and credits? Well, debits and credits are used to show monetary changes within those individual accounts. They help to keep a detailed record of all the increases and decreases within our accounts, account groups, and financial statements. So debits and credits can either be increases or decreases. It just depends on the type of account that we're working with.

And another thing to remember about debits and credits, going back to our accounting equation, is that in total our debits must always equal our credits. That's very important when you're looking at entries within our specific accounts, is that our debits in total must always equal our credits in total.

OK. So now let's look at some examples of accounting events. So if we have a cash sale, there's going to be two accounts impacted. We're going to have assets impacted for the cash and revenue impacted for the sale.

So let's look at the assets. Let's look at our cash. So what's going to happen to cash? Well, we're going to have a transaction that takes place, a cash sale, on any given date that this happens. And we're going to put that debit into the cash m because we're receiving cash for the sale, so our cash is going up. So that's going to be our debit to cash.

And now we also have our revenue. So let's take a look at our revenue. So the revenue-- remember we had $1,000 cash debit. We're also going to credit revenue for $1,000. So again, our total debits equal our total credits for that cash sale.

Let's look at another example, salaries. So for salaries, we're going to have expenses for the expense that we're incurring, and then liabilities for the money that we owe. Starting with the expenses, so if we look at our expense account for salaries we're going to have a debit to that expense, because debits increase our expenses.

So then we're going to need to have a corresponding credit. And that credit is to our liabilities. So it's money that we owe. So if we look at our salaries payable for the salaries that we owe, we're going to see a credit in that salaries payable. So again, our total debits of $750 equal our total credits of $750.

Let's look at another example, an owner contribution. So an owner is contributing cash to a business, so equity and cash are going to be impacted, starting with the equity. So if we look at our owner's equity account for a cash contribution what are we going to see? We're going to see a credit to owner's equity, because the owner is contributing cash, so their equity is growing. And equity is increased through credits.

So then we should see a corresponding debit of equal value. In this case, we do. If we look at cash, cash came in. We received cash from that contribution, so our cash is debited for $2,000. And again, our total debits of $2,000 equal our total credits.

So let's wrap it up in a nutshell. Today we looked at the basic accounting equation. What is the basic accounting equation? Assets equal liabilities plus owner's equity. This is an important thing to understand as you set the framework for the debits and credits that we talked about.

And this must balance. So we talked about our debits and credits. In total, our debits and credits must equal.

Thanks, everyone. I hope you enjoyed the video. And I hope to see you next time.

Notes on "Debit and Credit"

Terms to Know

Debit

Entry made on the left side of an account.

Credit

Entry made on the right side of an account.