✍🏻 Posted by Lee Ingram on 9/14/23. ⏱️ Total Reading Time: ~10 minutes
Welcome to one of the most critical topics you'll encounter in your accounting journey—understanding debits and credits. These two little words can be confusing, but they hold the key to mastering the language of accounting. In this comprehensive guide, you'll find a simple explanation of debits and credits, visual aids, pro tips for exams, memorization tricks, and we'll even debunk some common myths.
🚀 Let’s get started!
Table of Contents
- The Basic Principle: Debits and Credits
- Understanding the Five Types of Accounts (i.e. the “Hierarchy”)
- Visualize The Hierarchy Horizontally For Better Memorization
- Pro Tip for Exams
- Memorization Tricks
- Debunking Common Debit/Credit Myths
- Summary and Takeaways
Section 1: The Basic Principle
📌 Debits are always on the left, and credits are always on the right.
Remember this principle as you read through this guide. It's a constant truth in accounting that hasn't changed in over six centuries!
What are Debits and Credits, Anyway?
You might hear the terms "debit" and "credit" thrown around and wonder what they really mean. At their core, debits and credits are simply tools for recording what happens in our accounts as a result of a business transaction. When a transaction occurs, accounts need to be adjusted — either increased or decreased. This is where debits and credits come into play:
- Debit (Dr): This is an entry that appears on the left side of a journal entry. Debits serve to either increase or decrease an account, depending on the nature of the account. You'll see how this works in the upcoming sections.
- Credit (Cr): This is an entry that appears on the right side of a journal entry. Much like debits, credits can either increase or decrease an account, based on the account type.
By understanding the fundamental roles of debits and credits, you will be better equipped to understand journal entries and record/interpet them accurately on your exams.
Section 2: Understanding the Five Types of Accounts (i.e. the “Hierarchy”)
Here's a simplified method to understand how debits and credits affect the five types of accounts:
- Assets always increase with debits and decrease with credits: (+/-)
- Liabilities always decrease with debits and increase with credits: (-/+)
- Equity always decreases with debits and increase with credits: (-/+)
- Revenues always decrease with debits and increase with credits: (-/+)
- Expenses always increase with debits and decrease with credits: (+/-)
Don’t have the 5 types of accounts locked down yet? Stop what you’re doing immediately and watch my FREE 5 minute video below.
Section 3: Visualize The Hierarchy Horizontally For Better Memorization
Visualizing this horizontally is often much easier for students to memorize. See below.
Section 4: Pro Tip for Exams
🎓 The key to acing your exams lies in internalizing the accounting hierarchy and having it readily accessible in your memory. One proven method for achieving this is by consistently writing it down. Make it a practice to jot down this vital information while solving homework problems and, crucially, at the top of every page of your exam paper. This will serve as a quick reference during the test, helping to alleviate mental strain and reduce mistakes.
Section 5: Memorization Tricks for Mastering Debits and Credits
Memorization Trick #1: A = L + E
- Observe A = L + E above and notice that Assets work on a (+/-) basis, while both Liabilities and Equity operate on a (-/+) basis. The flip across the equals sign serves as a great visual memory aid. (say it yourself: “whenever you hop over the equal sign, everything flips!”)
Memorization Trick #2: The Revenue-Equity & Expense-Equity Relationship
- Revenues and Equity both operate on a (-/+) basis. Earning revenue increases a company's value, reflected in its equity. Therefore, it makes intuitive sense that they share the same debit and credit behavior. Increasing one also increases the other!
- Expenses operate on a (+/-) basis, opposite to Equity's (-/+). When costs rise, company value (equity) drops. This logical relationship makes it easy to remember that they work inversely. Increasing expenses decreases equity!]
Memorization Trick #3: The Asset-Expense Connection
- Students find it helpful to remember that both Assets and Expenses operate on a (+/-) basis. This simple correlation will be further explored below, especially when dispelling common myths about debits and credits.
Section 6: Debunking Common Myths
If you've been believing any of the following myths, it's essential to unlearn them now:
- Myth #1: Debits always increase things, while credits always decrease things.
- This is not true!
- Myth #2: Debits are for showing we received something, while credits show we gave something away.
- Again, false!
- Myth #3: Credits are like a credit card, debits are like a debit card.
- Completely different in accounting!
Section 7: Summary and Takeaways
You now have a solid understanding of debits and credits, how they affect different types of accounts, and some memorization tricks to help you excel in your exams. Don't forget to test your understanding with the following resources below!
🤯 Stressed About Your Upcoming Accounting Exam?
Don't worry, you're not alone. Remember, the goal of this blog post was to guide you on the confusing nature of debits and credits, so that you can avoid costly mistakes on your exams. With diligent practice, these principles will become like second nature to you. For a deeper dive, make sure to check out my Chapter 2 Cheat Sheet. (requires Survive Plan subscription)
Searching for the ultimate study tools? At SurviveAccounting.com, you’ll find an arsenal of videos, quizzes, practice exams, flashcards, and pro exam tips to help you ace exams, impress your professors, and transform yourself into an expert on debits and credits. Try out my Chapter 1 Exam Prep resources for free and experience the difference for yourself.
And there you have it—your roadmap to mastering debits and credits, and beyond. Master these principles, and you're not just passing that introductory accounting exam—you're acing it. Best of luck, and happy studying!
Your partner in exam domination, Lee
About the Author
✍🏻 Lee Ingram is the founder of SurviveAccounting.com, your trusted guide to acing your accounting exams. With two accounting degrees and 8+ years of experience, Lee has helped nearly 1,500 students conquer their fears and pass their exams.
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