Debits and Credits
Master the rules of debits and credits, normal balances, the DEALER mnemonic, and contra-account mechanics.
TL;DR
- Remember that a
debitalways occupies the left side of accounts. - Use the
dealermnemonic to identify normal balances for all accounts. - Verify that total
debitsmatch total credits for every transaction entry.
The Core Definition
Debit (Dr)Signifies an entry placed on the left-hand column of a financial ledger account.
Debit = Left side of an account ledger (Dr)Credit (Cr)Signifies an entry placed on the right-hand column of a financial ledger account.
Credit = Right side of an account ledger (Cr)The Golden RuleMandates that total debits must perfectly equal total credits across every entry.
Sum of Debits = Sum of Credits for every entryThe Bank ParadoxClarifies that bank statements reflect the financial institution's liability to you.
Bank Cr = Your Dr (bank's debt is your asset)The DEALER Mnemonic
Dividends & DrawsReflects capital distributed out to company owners, increasing via debit entries.
Normal Balance: Debit | Dr Increase, Cr DecreaseExpensesCaptures operational resources consumed to generate revenue, increasing via debit entries.
Normal Balance: Debit | Dr Increase, Cr DecreaseAssetsRepresents economic resources owned and controlled, increasing via debit entries.
Normal Balance: Debit | Dr Increase, Cr DecreaseLiabilitiesRepresents outstanding debts owed to external creditors, increasing via credit entries.
Normal Balance: Credit | Cr Increase, Dr DecreaseEquityMeasures owners' residual claims against business assets, increasing via credit entries.
Normal Balance: Credit | Cr Increase, Dr DecreaseRevenueRecords gross income earned from delivering products or services, increasing via credit.
Normal Balance: Credit | Cr Increase, Dr DecreaseContra-Account Rules
Contra-Asset AccountsOffsets gross property or receivable balances, carrying an inverted credit normal balance.
Accumulated Depreciation: Normal Credit BalanceAllowance for Bad DebtOffsets gross customer receivables for estimated uncollectible balances via credit.
Allowance for Doubtful Accounts: Normal CreditContra-Equity AccountsReduces total stockholders' equity through repurchased common shares via debit.
Treasury Stock: Normal Debit BalanceContra-Revenue AccountsReduces gross customer sales for returns, damaged goods, or prompt discounts.
Sales Returns & Allowances: Normal Debit BalanceT-Account Mechanics
Account HeaderPositions the formal account name at the top center of the T-frame.
Top Center: Account Title (e.g. Cash #1010)Left Column EntriesRecords every debit entry with transaction date and numerical currency amount.
Left Column: All debit transaction additionsRight Column EntriesRecords every credit entry with transaction date and numerical currency amount.
Right Column: All credit transaction deductionsAccount FootingComputes the final net balance on the side with the larger numerical total.
Ending Bal = Larger Column Sum - Smaller Column SumTips
- Memorize the
dealeracronym to immediately know whether an account increases with a debit or credit during journal entry preparation. - Track contra-accounts like
accumulatedDepreciationcarefully, remembering that their normal balances run in the exact opposite direction of their parent category.
Warnings
- Never use bank statement terminology in your books; a bank
creditis a deposit liability to them, not your income. - Do not post any journal entry where total
debitsfail to equal total credits, or your trial balance will break.
In Practice
Trace three startup events through the DEALER mnemonic, posting debits and credits to prove balance.
A founder invests $10,000 cash into Common Stock, pays $3,000 cash for equipment, and buys $1,500 of supplies on vendor credit.
- Event 1: Dr Cash $10,000 (Asset up) and Cr Common Stock $10,000 (Equity up).
- Event 2: Dr Equipment $3,000 (Asset up) and Cr Cash $3,000 (Asset down).
- Event 3: Dr Supplies Expense $1,500 (Expense up) and Cr Accounts Payable $1,500 (Liability up).
- Total ledger debits equal $14,500 ($10,000 + $3,000 + $1,500) and match total credits of $14,500 ($10,000 + $3,000 + $1,500).
Debits and credits balance at $14,500, keeping the accounting equation in exact equilibrium.
Applying the DEALER mnemonic ensures every transaction maintains equal debits and credits across the ledger.
FAQ
In bookkeeping, debit simply means the left side of an account and credit means the right side, originating from the Latin words debere and credere. Neither term inherently means an increase or decrease; the direction depends entirely on the account's underlying classification.
The dealer mnemonic splits accounts into two groups. The left side, DEA, stands for Dividends, Expenses, and Assets, which increase with a debit and carry normal debit balances. The right side, LER, stands for Liabilities, Equity, and Revenue, which increase with a credit and carry normal credit balances.
Because the bank prints statements from their perspective, not yours. When you deposit cash, the bank owes that money back to you, which increases their liability toward you via a credit. On your own balance sheet, that exact same deposit is recorded as a debit to increase your cash asset.
A contra-account is paired with a primary account to reduce its gross carrying value on the financial statements. Because it offsets its partner, its normal balance is opposite: accumulatedDepreciation is a contra-asset carrying a normal credit balance, while treasuryStock carries a normal debit balance.