Asset accounts have debit balances.
Debits increase Asset accounts. Credits decrease Asset accounts.
Liability accounts have credit balances.
Credits increase Liability Accounts. Debits decrease Liability Accounts.
Equity accounts have credit balances.
Credits increase Equity Accounts. Debits decrease Equity Accounts.
Income accounts have credit balances.
Credits increase Income Accounts. Debits decrease Income Accounts.
Cost of Goods Sold accounts have debit balances.
Debits increase Cost of Goods Sold accounts. Credits decrease Cost of Goods Sold accounts.
Expense accounts have debit balances.
Debits increase Expense accounts. Credits decrease Expense accounts.
Debits and Credits – The basic formula.
What you OWN – What you OWE = What you’re WORTH ASSETS – LIABILITIES = EQUITY
The basic formula of double-entry bookkeeping is based on Assets-Liabilities = Equity. Even if you have not had any training, I believe you can understand these principles. This is a common-sense formula. If you were to determine what your business was worth if you wanted to sell it, you would look at what the business owns that is of value (Assets), you would subtract your debt (Liabilities), and the result would represent your net worth (Equity). These are the types of accounts that are shown on the Balance Sheet.
While Assets, Liabilities and Equity are types of accounts, debits and credits are the increases and decreases made to the various accounts whenever a financial transaction occurs.
The cardinal rule of bookkeeping is that DEBITS must equal CREDITS.
There is no limitation on the number of debits or credits in a transaction, but the total dollars of each must be equal.
ASSETS = LIABILITIES + EQUITY DEBITS = CREDITS
Asset accounts normally have DEBIT balances. When you deposit money in your bank account you are increasing or debiting your Checking Account. When you write a check, you are decreasing or crediting your Checking Account.
Liability and Equity accounts normally have CREDIT balances. If you borrow money from a bank and deposit it in your Checking Account, you increase or credit a Liability account, Bank Loan Payable, and increase or debit an Asset account, Checking Account.