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Debits and Credits, Pt 1

When many people who learn accounting for the first time learn about Debits and Credits, they think that debts have to do with debtors and credits have to do with creditors, and try to think through their accounting entries. In fact, Google "debit and credit in accounting" and you will not find a simple way of understanding what how to debit and credit accounts properly.

While I will expand on this over time, a good teacher should impress upon a student that there is no point in thinking about debits and credits in terms of debt and credit. One proper way this topic should be taught early to enforce good habits is as follows:

1) Begin with the T-account structure and explain that Debit means Left and credit means Right.
2) Provide a balance sheet with the asset accounts on the left and the liability/equity accounts on the right.
3) Explain that if an account is on the left (asset or contra-liability or contra-equity), a debit entry (left) increases the account balance and a credit entry (right) reduces the balance. If the account is on the right (liability, contra-asset, equity), a debit entry (left) reduces the account balance and a credit entry (right) increases the account balance.

Later, a similar argument is made for revenues and expenses as they feed equity. Revenues (right) increases shareholders equity and expenses (left) reduce shareholders equity.

Students who persevere with their accounting studies ultimately learn this way of thinking, but why don't teachers save the trouble from the start? By discouraging students from thinking of debits and credits the way we use them in everyday English and helping them realize that debits and credits are simply based on how the balance sheet and financial statements are formatted, a teacher can do a huge service to a student and remove a barrier that confuses many students in their initial encounters with accounting.


Abolaji O.

Great Teacher with Experience at All Levels

20+ hours