The Cheat Sheet for Debits and Credits

The “Cheat Sheet” for Debits and Credits by Linda Logan, Partner/President/Founder of Fiscal Foundations LLC

Asset accounts have debit balances.

Debits increase Asset accounts.
Credits decrease Asset accounts.

Liability accounts have credit balances.

Credits increase Liability Accounts.
Debits decrease Liability Accounts.

Equity accounts have credit balances.

Credits increase Equity Accounts.
Debits decrease Equity Accounts.

Income accounts have credit balances.

Credits increase Income Accounts.
Debits decrease Income Accounts.

Cost of Goods Sold accounts have debit balances.

Debits increase Cost of Goods Sold accounts.
Credits decrease Cost of Goods Sold accounts.

Expense accounts have debit balances.

Debits increase Expense accounts.
Credits decrease Expense accounts.

Your bank account is an asset. It is something of value that you own. When you deposit money into your account, you are increasing that Asset account. What increases an Asset account? A debit.

CHALLENGE QUESTION – If a bank deposit is a debit to your bank account, why does your bank statement call it a credit?

ANSWER – Because the bank statement is stated from the bank’s point of view. The money deposited into your checking account is a debit to you (an increase in an asset), but it is a credit to the bank because it is not their money. It is your money and the bank owes it back to you, so on their books, it is a liability. An increase in a Liability account is a credit.

What you OWN – What you OWE = What you’re WORTH
ASSETS – LIABILITIES = EQUITY

This is the basic formula on which double-entry bookkeeping is based. Even if you have not had any training, I believe you can understand these principles. This is a common-sense formula. If you were to determine what your business was worth if you wanted to sell it, you would look at what the business owns that is of value (Assets), you would subtract your debt (Liabilities), and the result would represent your net worth (Equity). These are the types of accounts that are shown on the Balance Sheet.

For the next logical step, I’ll ask you to recall a little Algebra from high school. Remember that if you add or subtract an amount from one side of an equation, you must do the same to the other side in order to keep the equation equal. So we can do the following:

ASSETS – LIABILITIES + LIABILITIES = EQUITY + LIABILITIES

Now the formula can be stated as:

ASSETS = LIABILITIES + EQUITY
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While Assets, Liabilities and Equity are types of accounts, debits and credits are the increases and decreases made to the various accounts whenever a financial transaction occurs.

The cardinal rule of bookkeeping is that DEBITS must equal CREDITS.

There is no limitation on the number of debits or credits in a transaction, but the total dollars of each must be equal. Let’s take an example:

You go to Office Max and write a check for $2,605 to purchase a computer, paper and ink cartridges.

What accounts would be affected?

Office Equipment + Office Supplies = Checking Account
$2500           +           $105           =            $2605
DEBITS       =    CREDITS

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 ASSETS = LIABILITIES + EQUITY
DEBITS = CREDITS

Asset accounts normally have DEBIT balances. When you deposit money in your bank account you are increasing or debiting your Checking Account. When you write a check, you are decreasing or crediting your Checking Account.

Liability and Equity accounts normally have CREDIT balances. If you borrow money from a bank and deposit it in your Checking Account, you increase or credit a Liability account, Bank Loan Payable, and increase or debit an Asset account, Checking Account.