Debit and Credit Theory

Debit and Credit Theory

• Do not be confused by the cards you have in your wallets and purses.

• In accounting, Debit refers to the LEFT side of an account and Credit refers to the Right side. Every account is described this way.

Debit and Credit Theory

• Debit comes from debere in Latin. It means to owe. Credit comes from credere which means to trust or believe.

• These lead to words like “debt” and “in debt,” which sound bad and words like “credible” and “credentials” which sound good.

• So, asset accounts have the values on the left (debit) side and liability accounts have the values on the right (credit) side.

• Therefore, asset accounts have debit values, liability accounts have credit values.

The Rules of Debit and Credit

Applying the Rules of Debit and Credit

• Transaction 1 – The company purchases$200 worth of supplies from PackhamProducts, to be paid for later.

• Step 1: Names of affected accounts.

Applying the Rules of Debit and Credit

• Step 2: What kind of account?

• Step 3: Increase or decrease?

Applying the Rules of Debit and Credit

• Step 4: Debited or credited?

• Step 5: Value of change?

Applying the Rules of Debit and Credit

• The last step completes the Accounting Entry for that transaction.

• The Accounting Entry can be defined as all of the changes in the accounts caused by one business transaction. We write in terms of debits and credits.