DEBIT and CREDIT PROCEDURES/ How to record debits and credits for different accounts

DEBIT and CREDIT PROCEDURE

Since debit is the money going out of the account. Debit increases the left side of the above equation i.e. debit increases the assets, expenses, and dividends. Therefore increase in these accounts results in outflow of money thus an debit account.

Credit is the money flowing into the account. Credit increases the right side of the above equation i.e. credit increases liability, common stock, and revenue. Therefore increase in liability, common stock, and revenue results in inflow of money and thus represents the credit account.

Double entry system of Accounting

Each transaction affects the basic accounting equation. Each transaction has effects on two or more accounts keeping the basic accounting equation balanced. In other words debits must be equal to credits. The equality of credit and debit provides a basis for double entry system for recording transactions. Double entry system records the dual (two sided) effect of transaction either on debit or credit side of the account.

Debit / Credit procedure for:

1. Asset and Liabilities

To determine the debit or credit of transaction we need to keep in mind the basic meaning of debit and credit i.e. debit means outflow of money and credit means inflow of the money.

Assets are resources owned by the company which are used in production process and reaps future benefits and returns.

Increase in assets involves outflow of money therefore debit increases assets account or in other words increase in assets are recorded on the left side or debit side. On contrary, credit decreases assets i.e. decrease in assets are recorded on the credit side.

Liabilities are the claims of the creditors (loans or debts or payable).

Increase in liability results in inflow of money therefore increase in liability is recorded on the right side or credit. Therefore credit increases liability account. On contrary decrease in liability implies payment of the debts or payable i.e. outflow of money thus a debit. Debit decreases liability.

Normal balance or balance is the difference between the credit and debit side of the account. Normal balances are recorded on the side where there is increase in the account. In case of assets it is recorded on the debit side (i.e. debit balance) and for liability it is recorded on the credit side (credit balance).

Normal balance may help to find errors. For example: a credit balance in assets and debit balance in liability implies an error.

2. Stockholder’s equity

Stockholders equity has five subdivisions: common stock, retained earnings, revenues, expenses and dividends.in double entry system, company creates separate accounts for these subdivisions.

Common Stock

Common stock is the share of stock owned by the shareholder in exchange of money invested in the company. Common stock results in inflow of money therefore credit increases common stock account and debit decreases common stock account.

Retained Earnings

Retained earnings are the net income retained with the company. It is a part of stockholder’s equity that the company accumulates through profitable operation of the company. Increase in retained earnings (net income) results in inflow of money therefore is recorded on the right or credit side. Credit increases retained earnings account and Debit decreases retained earnings account.

Revenues and Expenses

Revenues explain as to why stockholder’s equity increases.  Credit increases revenue account and debit decreases revenue account.

Expenses has opposite effect. Expenses decreases stockholder’s equity. Debit increases expenses account and credit decreases expense account.

Dividends

Dividends are the distribution to the stockholders. Cash distribution is one type of dividends.

Credit decreases dividends account and debit increases dividend account.