General Accounting FAQ

What do debit and credits do?

• Debits (Dr or S) increase asset and expense accounts, but decrease liability, equity (or net assets, when dealing with a not-for-profit entity like Penn State), and revenue accounts.
• Credits (Cr or H) increase liability, equity (net assets), and revenue accounts, but decrease asset and expense accounts.
• Equal balance: In every double-entry transaction, total debits must equal total credits.

This is the basic formula on which double-entry bookkeeping is based:

• Liabilities are what the business owes. Examples include interest payments, overdraft fees, payments to other entities, money owed for utilities, etc.
• Assets are things the business owns. Properties, the company's bank balance, and the equipment used to operate your business go here.
• Equity (net assets) is basically the total dollars left in the business when liabilities have been paid.

A bank account is an asset. It is something of value owned by the company. When money is deposited into the account, you are increasing that Asset account. What increases an Asset account? A debit.

If you were to determine what a business was worth, you would look at what the business owns that is of value (Assets), you would subtract your debt (Liabilities), and the result would represent the net worth (Equity (net assets)). These are the types of accounts that are shown on a Balance Sheet.

While Assets, Liabilities and Equity (net assets) are types of accounts, debits and credits are the increases and decreases made to the various accounts whenever a financial transaction occurs.

There is no limitation on the number of debits or credits in a transaction, but the total dollars of each must be equal.

Debits and credits are the building blocks of bookkeeping. A debit may be referred to as a "DR," while a credit may be referred to as "CR." These are the standard shortcut references.

If a company buys $10,000 worth of monitors on credit, the purchase translates to a $10,000 increase in equipment (an asset) and a $10,000 increase in accounts payable (a liability) for money owed. At the end of the month, the bill is to be paid. The accounts payable account will be debited to remove the liability, and the cash account will be credited to reflect payment.

It depends on the context. In personal banking, a debit is generally seen as negative because it reduces the balance in an account. In accounting, a debit is neither inherently positive nor negative. Instead, it increases some types of accounts and decreases others. The effect depends on the type of account. For example, debits:

• Increase asset accounts, which is typically seen as a positive for the business.
• Increase expense accounts, typically seen as negative.
• Decrease liability accounts, typically seen as positive.
• Decrease equity (net asset) accounts, typically seen as negative.
• Decrease revenue accounts, typically seen as negative.

This difference between personal banking and accounting perspectives often causes confusion. In accounting, “debit” and “credit” refer to which side of the ledger an entry is recorded on, rather than directly indicating an increase or decrease.

Debits increase asset, loss, and expense accounts; credits decrease them. Credits increase liability, equity (net assets), gains, and revenue accounts; debits decrease them.

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.