About Debits and Credits in Double Entry Accounting

In the double-entry system each transaction must be recorded with at least one debit and one credit, in such a way that the total dollar amount of debits and the total dollar amounts of credits equal each other. As a result, the system as a whole is always in balance.

One of the best ways to illustrate double-entry accounting is with a T Account, as defined earlier in About Transaction Analysis of Debits and Credits. To summarize, debits and credits increase or decrease accounts depending on what side of the accounting equation they are on. The accounting equation is as follows:

Assets = Liabilities + Equity/Fund Balance

For this equation to stay in balance, if assets are increased by debits then there must be a corresponding credit to liabilities or equity to increase them.

Revenues and expenses fit into this equation through Equity/Fund Balance. At the end of a given accounting period, net revenues and expenses (net income) are cleared with the net income amount increasing or decreasing Equity/Fund Balance. Since revenues are credits and expenses are debits, a net of revenues over expenses is a net credit, increasing Equity/Fund Balance.

These relationships are best illustrated in the following T Accounts.