If you don't mind blindly memorizing the rules for when a debit and credit increase and decrease an account, you can use the following mnemonics:
Debits increase on the D-E-A-L accounts: Dividend - Expense - Asset - Loss
Credits increase on the G-I-R-L-S accounts: Gains - Income - Revenue - Liability - Stockholders' equity
Or if you write out the standard accounting equation:
Assets = Liabilities + Equity
Assets = Liabilities + Equity=(Equity + Revenue - Expenses)
Assets + Expenses = Liabilities + Equity + Revenue
the accounts on the left increase due to a debit and the accounts on the right increase due to a credit.
But why??
It all comes down to perspective--specifically, the perspective of the entity dealing with company. Debit mean some other entity owes the company money, credit means the company owes someone else, ie, someone else has credited or entrusted his or her money with the company.
Liability Accounts: Starting off with a bank and your customer accounts (a Liability), when you put money into that account, it shows up as a credit. For the bank, your account is a Liability--a debt--it must pay back to you. You have given the bank a credit or loan, so to speak, so the bank records an increase in your account as a credit.
Asset Account: When the bank buys a building, it debits and increases its Asset account. Thinking of the building as a person, that building owes the company cash. It's in debt to the company so the company debits / increases its Asset account. All Asset accounts are normally in debit, ie, "in debt."
Equity Account: When a stock owner gives cash to the company, the equity account increases. They have given the company a credit / loan just like a customer depositing money in their bank. So increases to Equity accounts are credits and Equity accounts are normally in credit.
Expense and Revenue Accounts: These are really just parts of the Equity Account. When Revenue comes in, the company owes more to the Stockholders / Owners, who have given the company a credit. So, when a Revenue Account increases, it is a credit--the Owners are giving the company more credit. An Expense account has the opposite effect. When an Expense account increases (ie, an electric bill is paid), the Owners have effectively decreased the credit they are giving to the company. So an Expense Account increase is a debit, a reverse credit so-to-speak.
Positive and Negative Numbers in Accounting Software:
Rather than store numbers on the left or right side of a journal, accounting software records debits as positive numbers and credits as negative numbers. This applies to all types of accounts.
Say you sell a widget for $5 that costs $1 to buy. Your accounts would then look like the following:
| Account | Balance |
| Cash (Asset) | $4 |
| Cost of Good Sold (~Expense) | $1 |
| Revenue | -$5 |
You might be tempted to put those into the equation above:
Assets($4) + Expenses($1) = Liabilities (0) + Equity (0) + Revenue($-5)
But you'd have to drop the negative sign--it's only a marker in the software that the account is on the other side of the equation. All of your accounts should sum to 0 vertically.
This post is an attempt to explain why debits and credits increase and decrease the various accounts beyond just memorizing the rules. I believe it all comes down the original definition of debit (owing someone) and credit (lending / entrusting) PLUS careful consideration of the perspective from which each account is looking.
Your bank account and its money are a credit to the bank and a debt the bank owes you. It seems equally viable that when you put money in your bank account--when you increase that account--that transaction could be called either a debit or a credit. The bank now owes you more money and is more in debt, so it certainly seems like that increase could be called a debit, but the account is thought of from the perspective of the customer; the customer gives the bank more credit when they put money in.
This particular perspective seems to have been arbitrarily decided centuries ago, although I don't see any reason you couldn't flip perspectives as long as you're consistent.
