What are Debits and Credits?

Debits and credits are the two sides of every accounting transaction. They are used to record changes in account balances in the accounting system, following the principles of double-entry bookkeeping.

Here's what they mean:

Debits:

Debits are entries made on the left side of an account.
They increase asset accounts and decrease liability and equity accounts.
In simple terms, debits represent money coming into the account or increases in assets.
Credits:

Credits are entries made on the right side of an account.
They increase liability and equity accounts and decrease asset accounts.
In simple terms, credits represent money going out of the account or decreases in assets.
To understand debits and credits better, it's essential to remember the accounting equation:

Assets
=
Liabilities
+
Equity
Assets=Liabilities+Equity

When an asset account is increased (e.g., receiving cash), it is debited.
When a liability or equity account is increased (e.g., borrowing money or earning revenue), it is credited.
Conversely:

When an asset account is decreased (e.g., paying cash), it is credited.
When a liability or equity account is decreased (e.g., repaying a loan or incurring an expense), it is debited.
Debits and credits are used to maintain the balance in the accounting equation and ensure accurate recording of financial transactions. They are the foundation of double-entry bookkeeping, which provides a systematic way to track and document financial activities.