Within the accounting system the concept of double entry bookkeeping whereby every accounting transaction affects at least two accounts.
The entry recorded on the left is known as the “debit” and the entry recorded on the right is known as the “credit”.
The debit entry can increase an asset or expense and decrease an income or liability account whereas a credit can decrease an asset or expense account and increase an income or liability account.
Within the accounting process there are rules that govern to use of debits and credits
- Accounts with a debit balance increase when a debit is entry is added
- Accounts with a credit balance increase when a credit is entry is added
- The total dollar value of all debits must equal the total dollar value of all credits
The most common accounts where debits and credits are applied are as follows
- Sales – debit accounts receivable & credit sales
- Sales Invoice Paid – debit bank & credit accounts receivable
- Cash Sales – debit bank & credit sales
- Cash Purchase – debit expense account & credit bank
- Bank Loan – debit bank & credit loan payable
- Repay a Loan – debit loan payable & credit bank
- Pay Employees – debit wage expense & credit bank
- Bank Interest – debit interest expense & credit bank
Thus all accounting transactions are tracked as either a debit or credit in the accounting ledger.
Please note: Prepared by Leigh Barker Tangible Assets, Accountant at MWC Group, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.