Most of the readers get confused when an accountant debit or credit a transaction. Readers who don’t have accounting background ( even with little accounting background) generally think that a debit means an increase in the account and a credit means a decrease in the account. This thought is totally wrong. A debit can show a decrease in the account and a credit can show an increase in the account. It depends on the type / category of account we are dealing with. Generally there are seven types / categories of accounts.

  • Assets
  • Expenses
  • Losses
  • Liabilities
  • Revenues
  • Profits
  • Capital

Now which account type will show an increase / decrease when a debit entry is passed to it and which account type will show an increase / decrease when a credit entry is passed to it. Accounting equation explains this logic.

Assets = Liabilities + Capital

Above accounting equation can be further extended to show all seven types of accounts as follows.

Assets + Expenses + Losses = Liabilities + Revenues + Profits + Capital

Those types of accounts which are written to the left-side of the accounting equation shows an increase when a debit entry is passed to it and those types of accounts which appear on the right-side of the accounting equation shows a decrease when a debit entry is passed to it. Similarly, account types which appear to the left-side of the accounting equation shows a decrease when a credit entry is passed to it and those account types which appear to the right-side of the accounting equation shows an increase when a credit entry is passed to it.

Still confused? Following image summarizes this logic and better explains the concept.

Debit and Credit

  1. Account type “Assets” includes cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment,  vehicles, patents and copyrights.
  2. Account type “Expenses” includes repair charges, payments, pre-payments, rent, electricity bill, interest paid,  salaries expense etc.
  3. Account type “Losses” includes loss on sale of property, impairment loss, loss on sale of investment etc.
  4. Account type “Liabilities” includes accounts payable, notes payable, unearned revenue etc.
  5. Account type “Revenues” includes sale of goods / services.
  6. Account type “Profits” includes profit on sale of investment, profit on sale of goods / services, interest received etc.
  7. Account type “Capital” includes owner’s equity, shares of other companies etc.

Examples:

  • Received a payment of $200 from a customer.

⇒ Increase Cash / Bank Account (Debit)

⇒ Increase Revenue (Credit)

  • Repaid bank loan debt of $300

⇒ Decrease bank loan liability (Debit)

⇒ Decrease Cash / Bank Account (Credit)


Additional Information

Debits and Credits

Chart of Accounts

Defining Accounts