The basis Accounting and Bookkeeping's rule is:

This rule is the basis for the double entry bookkeeping system.

Definitions of Debits and Credits

Debit (Left)

• An entry in the financial books of a firm that increases an asset, draw, or an expense or an entry that decreases a liability, owner's equity (capital) or income.
  
• Also, an entry entered on the left side (column) of a journal or general ledger account.

Let's combine the two above definitions into one complete definition.
An entry (amount) entered on the left side (column) of a journal or general ledger account that increases an asset, draw or an expense or an entry that decreases a liability, owner's equity (capital) or revenue.

Credit (Right)

• An entry in the financial books of a firm that increases a liability, owner's equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.
• Also, an entry entered on the right side (column) of a journal or general ledger account.

Let's combine the two above definitions into one complete definition.
An entry (amount) entered on the right side (column) of a journal or general ledger account that increases a liability, owner's equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.

This is where the key terms increase and decrease and the type of account (asset, liability, owner's equity, revenue, and expense) come into play. The term debit does not mean increase or decrease, nor does the term credit mean increase or decrease until the term is also associated with a type of account. In other words, debit does not always mean an increase nor does credit always mean a decrease , or vice versa. Also, the terms debit and credit do not refer to something good or bad.

How do Debits and Credits relate to our Accounting Equations ? They're the tools used to keep our equations balanced.

The Balance of the Left Side of the Equation (Asset Accounts) will normally have a DEBIT Balance and the Balance of the Right Side (Liability and Permanent Equity Accounts) will normally have a CREDIT Balance.

Before we explain and illustrate the debits and credits in accounting and bookkeeping, we will discuss the accounts in which the debits and credits will be entered or posted.

Note that a debit increases the balances on the left side of the accounting equation (assets) and has the opposite effect and decreases the balances on the right side of the equation (liabilities and owner's equity). Likewise, a credit decreases the balances on the left side of the accounting equation (assets) and has the opposite effect and increases the balances on the right side of the accounting equation (liabilities and owner's equity).

Generally, anything that increases the left side of the equation (property or assets) or decreases the right side of the equation (property rights or liabilities and equity) is considered a debit and anything that increases the right side of the equation (property rights or liabilities and equity) or decreases the left side of the equation (property or assets) is considered a credit.

The terms have to be associated with the types of accounts in order to gain their meaning. In other words, whether a debit or credit is an increase or decrease depends on the type of account.

Fully Expanded Version of The Accounting Equation and Debits and Credits

Since
(1) Property = Assets and
(2) Property Rights (Claims to the Property) = Liabilities + Equity,

the simple or abbreviated accounting equation Property = Property Rights expanded or restated became

Assets = Liabilities + Owner's Equity.

Current Owner's Equity = Beginning Owner's Equity + Owner's Investments + Revenues - Expenses - Draws

Taking this one step further, we arrived at our Fully Expanded Accounting Equation which included all the components that make up and affect Owner's Equity.

Our Expanded Accounting Equation Assets = Liabilities + Owner's Equity expanded or restated became our
Fully Expanded Accounting Equation
Assets = Liabilities + Beginning Owner's Equity + Additional Owner Investments + Revenues - Expenses - Draws.

We'll use the following table as an aid to see how all the pieces of the game called bookkeeping fit together:

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An Account is a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period.

All Accounts:

• Can Be Debited and Credited
• Have an Increase Side (Column) and a Decrease Side (Column)
• Have a Debit Side (Column) and a Credit Side (Column)
  Debit Side is the Left Side (Left Column)
  Credit Side is the Right Side (Right Column)
• Have a Type and are classified as an Asset, Liability, Equity, Revenue, Expense, or Draw
• Are Either a Balance Sheet or Income Statement Account
• Have a Normal Balance Amount that is normally a Debit Balance or a Credit Balance

The Normal Balance is the debit or credit balance that an account is expected to have.
The normal balance is also the side of the account that increases the balance of the account. Since the increase side of assets, draws, and expense accounts is the left (debit) side these accounts normally have a debit balance. Likewise, since the increase side of liabilities, revenue, and owner's equity (capital) accounts is the right (credit) side these accounts normally have a credit balance. In other words, since debits increase asset, draw, and expense accounts, they normally have a debit (left side balance). Conversely, because credits increase liability, equity, and revenue accounts, they normally have a credit (right side) balance.

Comment: An account can occasionally end up with a balance that is not its normal balance. A good example would be a business "strapped" for cash that ends up with a credit balance in its cash account by writing out checks for more funds than they have on deposit in the bank. This credit balance signifies that the account is overdrawn, and instead of being classified as an asset, which it normally is, is now a temporary liability (amount owed to bank).

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Assets + Draws + Expenses = Liabilities + Owner's Equity + Revenue
Normal Debit Balance Accounts = Normal Credit Balance Accounts

In this rearranged form of our fully expanded accounting equation, all the types of accounts that have a normal debit balance are listed on the left side of the equal sign and all the types of accounts that have a normal credit balance are listed on the right side of the equal sign.

Normal Account Balance

Debit Balances
• Asset - Normally a Debit Balance
• Draws - Normally a Debit Balance
• Expense - Normally a Debit Balance
  
  Credit Balances
• Liabilities - Normally a Credit Balance
• Owner's Equity ( Capital ) - Normally a Credit Balance
• Revenue - Normally a Credit Balance

It's usedful to learn some rules or methods:

(1) Memorize the definitions for debits and credits.

Debit - An entry (amount) entered on the left side (column) of a journal or general ledger account that increases an asset, draw or an expense or an entry that decreases a liability, owner's equity (capital) or revenue.

Credit - An entry (amount) entered on the right side (column) of a journal or general ledger account that increases a liability, owner's equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.

This is actually no different than memorizing the other terms that were presented in Lesson 1.

(2) Convert the Definitions To Detail Debit and Credit Rules and Memorize The Rules

Summarized Debit and Credit Rules Table

A debit increases an asset while a credit decreases an asset.
A debit decreases a liability while a credit increases a liability.
A debit decreases owner's equity while a credit increases owner's equity.
A debit decreases revenue while a credit increases revenue.
A debit increases an expense while a credit decreases an expense.
A debit increases a draw while a credit decreases a draw.

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T-Accounts are used as a tool to illustrate business transactions, debits and credits, double entry bookkeeping, and the purpose of accounts. It is called this because it has the form of the letter T. On the top of the horizontal bar there is the account title (name). Increases and Decreases are placed on the side of the vertical bar depending on whether the account type is an asset, liability or equity account. The left side of the T-account is called Debit, and the right side is called Credit. These terms are often abbreviated as Dr. and Cr.

Using this knowledge, we can state our simplified debit and credit rules as: All Accounts that Normally Have a Debit Balance (Left Side of Our Debit and Credit Equation) are Increased with a Debit and Decreased with a Credit.

• Assets
• Draws
• Expenses

Now, let's just use the first letter of each group to represent the type of account.

• Group 1
  A (Asset), D (Draw), and E (Expense)
• Group 2
  L(liability), O (Owner's Equity), and R (Revenue

All A, D, and E (Asset, Draw, and Expense) types of accounts, which normally have a debit balance, are increased with a debit and decreased with a credit.
All L,O, and R (Liability, Owner's Equity, and Revenue) type accounts, which normally have a credit balance, are increased with a credit and decreased with a debit.

All you have to remember is that:

1. Group 1 types of accounts (A, D, and E) all normally have a debit balance and their balances are increased by using a debit.
2. Group 2 types of accounts (L, O, and R) all normally have a credit balance and their balances are increased by using a credit.
3. Just use the other term (reverse) to record the decrease for each group.
   In other words, if a debit increases the balance of a type of account in the group, then a credit is going to decrease the balance of the type of account in the group. Likewise, if a credit increases the balance of a type of account in the group, then a debit is going to decrease the balance of the type of account in the group.

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Enter an amount in the Normal Balance Side of an Account to Increase the Balance of an Account and in the Opposite Side of an Account to Decrease the Balance of an Account.

Additional Clarification:
Since Assets, Draw, and Expense Accounts normally have a Debit Balance, in order to Increase the Balance of an Asset, Draw, or Expense Account enter the amount in the Debit or Left Side Column and in order to Decrease the Balance enter the amount in the Credit or Right Side Column.

Likewise, since Liabilities, Owner's Equity (Capital), and Revenue Accounts normally have a Credit Balance in order to Increase the Balance of a Liability, Owner's Equity, or Revenue Account the amount would be entered in the Credit or Right Side Column and the amount would be entered in the Debit or Left Side column to Decrease the Account's Balance.

How To Use and Apply The Debit and Credit Rules:

(1) Determine the types of accounts the transactions affect-asset, liability, revenue, or expense account.
(2) Determine if the transaction increases or decreases the account's balance.
(3) Apply the debit and credit rules based on the types of accounts and whether the balance of the account will increase or decrease.

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Debits and Credits are actually based on some Simple Concepts. What You Should Know About Debits and Credits An Account has an Increase Side (Column) and a Decrease Side (Column). The Left Side (Column) of an Account is the Debit Side (Column) and the Right Side (Column) of an Account is the Credit Side (Column). Debits are simply entries in the left column of an account and Credits are simply entries in the right column of an account. When you record an entry in the Left Side (Column) of an Account this is called Debiting an Account. When you record an entry in the Right Side (Column) of an Account this is called Crediting an Account. Debits do not always represent increases to an account's balance. Nor, do they always represent decreases to an account's balance. Likewise, Credits do not always represent increases to an account's balance. Nor, do they always represent decreases to an account's balance. Whether a Debit or Credit to an Account is an Increase or Decrease depends on the Type of Account - Asset - Liability - Owner's Equity - Revenue - Expense - Draw. A credit to a particular type of account always does the opposite that a debit does. In other words - if a debit increases an account's balance a credit decreases the account's balance or vice versa - if a debit decreases an account's balance a credit increases the account's balance. All Accounts have a Normal Balance which is either a Debit Balance or a Credit Balance. Assets, Draws, and Expenses all have Normal Debit Balances. Liabilities, Owner's Equity (Capital), and Revenue all have Normal Credit Balances. When using the double entry bookkeeping system, the sum of the debits must equal the sum of the credits for a transaction to be in balance. Every transaction must have a dollar entry entered on the left side of an account(s) and a dollar entry entered on the right side of an account(s). When calculating an Account's Balance, Debits are always added together and Credits are always added together; but a Debit and Credit are subtracted from each other. Just as you have a left and right side of the accounting equation, you also have a left and right side of an account. Every transaction involves at least one debit and one equal offsetting credit. If a transaction has more than one debit and/or credit, the total of the debits must equal the total of the credits. This is called a compound entry. The term Debit should not be associated with good or bad. Likewise the term Credit should not be associated with good or bad. If we properly use debits and credits to record and summarize our bookkeeping records, our Debits will always equal our Credits and provide some assurance that our records are accurate.

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