- Instead of using the terms left and right
to indicate which side of a T account is affected,
terms unique to accounting were developed:
debit, abbreviated DR, is used to indicate
the left side of the T account,
and credit, abbreviated CR,
is used to indicate the right side of a T account.
Debit means left, credit means right.
Nothing more, nothing less.
Let me say that again.
Debit means left and credit means right.
Now, in addition to representing
the left and right side of an account,
the terms debit and credit take on additional meaning
when coupled with specific accounts.
By convention, for asset accounts,
debits refer to increases.
And credits refer to decreases.
For example, to increase the cash account, we debit it.
To decrease the cash account, we credit it.
Since we expect the total increases in cash
to be greater than the decreases,
the cash account will usually have a debit balance
after accounting for all transactions.
Thus, we can make this generalization.
Asset accounts will usually have debit balances.
That is, their balance will typically
be on the left side of the T account.
Now, the opposite relationship
is true for liability and owner's equity accounts.
They are decreased by debits and increased by credits.
As a result, liabilities and owner's equity accounts
will typically have credit balances.
In addition to assets equaling liabilities
and owner's equity, debits should always equal credits.
If you fully grasp the meaning of these two equalities,
you are well on your way
to mastering the mechanics of accounting
or learning the language of accounting.
Debits and credits allow us to take a shortcut
to ensure that the accounting equation always balances.
If for every transaction debits equal credits,
then the accounting equation will always balance.
To understand why this is, keep in mind
three basic facts regarding double entry accounting.
First, debits are always added on the left side
of an account, and credits on the right side.
Second, for every transaction,
there must be at least one debit and one credit.
And third, debits must always equal credits
for every transaction.
If you can grasp these three points,
you're well on your way to understanding
the mechanics of accounting.