Debits and Credits
Definition
Debits and credits are the fundamental accounting entries that record financial transactions in a double-entry bookkeeping system, where every debit must have a corresponding credit.
Explanation
In double-entry accounting, debits (left side) and credits (right side) affect different account types differently. Assets and expenses increase with debits and decrease with credits. Liabilities, equity, and revenue increase with credits and decrease with debits.
The accounting equation (Assets = Liabilities + Equity) must always balance, and the total debits must equal total credits for every transaction. Understanding debits and credits is essential for accurate bookkeeping and financial reporting.
Example
A company purchases equipment for $5,000 cash. The journal entry is: Debit Equipment $5,000 (asset increases), Credit Cash $5,000 (asset decreases).