Understanding Debits and Credits: A Complete Guide

What is a credit?

A credit, on the other hand, is an accounting entry that represents a decrease in assets or an increase in liabilities. It is recorded on the right side of a T-account and is usually abbreviated as ‘CR’.

How debits and credits affect different accounts

Debits and credits have different effects on different types of accounts. Let’s take a look at how they affect liability accounts and equity accounts.

How debits and credits affect liability accounts

In liability accounts, debits decrease the account balance, while credits increase it. For example, if you make a payment on a loan, you would debit the loan account to decrease the outstanding balance.

How debits and credits affect equity accounts

In equity accounts, debits decrease the account balance, while credits increase it. For instance, if a company earns revenue, it would credit the revenue account to increase the equity.

Debits and credits in action

Let’s see how debits and credits are used to record transactions. When a company purchases inventory for cash, it would debit the inventory account to increase the inventory on hand and credit the cash account to decrease the cash balance.

Types of entry methods for recording transactions

There are different methods for recording transactions using debits and credits. Some common methods include the single-entry system and the double-entry system. In the single-entry system, only one entry is made for each transaction, while in the double-entry system, two entries are made to ensure that the accounting equation stays in balance.

Debits and credits chart

Here is a chart that summarizes the effects of debits and credits on different types of accounts:

Understanding debit (DR) and credit (CR)

There are a few theories on the origin of the abbreviations used for debit (DR) and credit (CR) in accounting. The most widely accepted theory suggests that ‘DR’ stands for ‘debit record’ and ‘CR’ stands for ‘credit record’. These abbreviations are used to quickly identify the type of entry in an accounting system.