Question

In double-entry accounting, what is the difference between debits and credits?

Answer 1

Short answer
- Debit (Dr) and credit (Cr) are the two sides of every double-entry accounting record.
- Every transaction is recorded with at least one debit and one credit, and the total debits must equal the total credits so the books stay balanced.

What they do (basic rule)
- Debits are recorded on the left side of an account; credits are on the right.
- Whether a debit or a credit increases or decreases an account depends on the account type.

How debits and credits affect common account types
- Assets: debits increase, credits decrease (assets normally have debit balances).
- Liabilities: credits increase, debits decrease (normal credit balance).
- Equity (capital/owner’s equity): credits increase, debits decrease (normal credit balance).
- Revenues (income): credits increase, debits decrease (normal credit balance).
- Expenses (and dividends/drawings): debits increase, credits decrease (normal debit balance).
Mnemonic: DEAD CLIC (Debits increase Expenses, Assets, Dividends; Credits increase Liabilities, Income, Capital).

Examples
- Company makes a $1,000 cash sale: Debit Cash $1,000; Credit Sales Revenue $1,000.
- Company buys equipment for $5,000 on credit: Debit Equipment $5,000; Credit Accounts Payable $5,000.
- Company pays $200 utility bill: Debit Utilities Expense $200; Credit Cash $200.

Why it matters
- Debits and credits are simply directional labels required by double-entry accounting; they keep the accounting equation (Assets = Liabilities + Equity) in balance and provide an audit trail of where value came from and where it went.

Practical note
- In modern accounting software you often enter “increase cash” or “decrease accounts payable,” but the system still records the appropriate debits and credits behind the scenes.