When to Debit, and When to Credit?

It's easy enough to understand that a debit is the left side of an account, and a credit is the right side of an account. The more difficult concept to grasp is when we should record an entry on the debit side, and when we should record an entry to the credit side.

To understand the answer to this question we must think back to the accounting equation itself...

If we are adding to the left side of the equation (ie. we are adding to an asset account, like cash), we will record the entry on the left side of the account. Similarly, if we are adding to the right side of the equation (ie. we are adding to liabilities or owner's equity, such as a Bank Loan), then we will record on the right side of the account.

Remember that the opposite must be done if we take away from either side of the equation. For example, if we take away from the left side of the accounting equation (ie. reduce an asset, like cash) then we will credit the account. Similarly, if we take away from the right side of the accounting equation (ie. if we are reducing a liability or owner's equity account, for example, if we reduce a bank loan), then we will debit the account.

Remember that some owner's equity accounts will ADD to owner's equity, and others will REDUCE owner's equity. Capital and Revenue ADD to equity, and therefore they will ALWAYS be credited. However, Drawings and Expenses REDUCE owner's equity, and therefore they will ALWAYS be debited.

Refer to the diagram of the accounting equation while you consider the account entries described below. In each case, determine whether these entries would be made to the debit side of the account or the credit side of the account. Check the solution for each entry when you are done.