Debit and Credit Theory
Accounts
 Accounts are individual items which affect financial
position.
 Examples are bank, mortgage payable, land,
equipment and capital.
 So far, we have grouped accounts into assets,
liabilities and owner’s equity.
The Simple Ledger
 The ledger is a grouping of all of the accounts of a
business.
 You may use the analogy of an account being an
individual page and the ledger as being the book
made up of those pages.
 Ledgers were traditionally on cards or on loose leaf
paper, but are now almost exclusively computerized.
Debits and Credits
 Each transaction will result in a change to at least
two accounts.
 The accounts may increase (inflow) or decrease
(outflow).
 Each account has two sides; a LEFT side and a
RIGHT side. We can represent this using a taccount.
ASSETS
Truck
inflows
outflows
LIABILITIES
Bank Loan
outflows
inflows
Debits and Credits
 Debit is the word associated with the LEFT side and
Credit is the word associated with the RIGHT side.
 Debit is abbreviated DR and Credits CR.
 Assets normally carry a DR balance and Liabilities
normally have a CR balance. For now, Owner’s
Equity will normally have a CR balance but this
section has some special rules… more later!
Debits and Credits (Continued)
 The dollar amount debited in a transaction must be
equaled by the dollar amount credited.
 DO NOT try to memorize how accounts are affected
by transactions. Learn how to analyze each
transaction and how to apply debit and credit theory.
Debits and Credits
 Also, do not think in terms of a debit being an
increase or a credit being a decrease.