Debit / Credit - How They Work in an Accounting Entry

2009-10-27T08:31:00.000-07:00

Accounting is a two entry system which means when you move a balance out of one account you have to move it into another. Debits and Credits denote a plus / minus relationship in accounting entries.

Each type of account in accounting has a 'natural balance' of either a debit or credit

For Example:

Income Statement
Revenue (Cr)
Expense (Dr)
Net Income (Cr / Dr)

Balance Sheet
Asset (Dr)
Liabilities (Cr)
Owners' Equity (Cr)

The positive or negative balance left in the account determines what debit or credit position the account will have.

Therefore:
A positive value in an asset account = the account is in its natural debit position
A negative value in an asset account = the account is in an unnatural credit position

Positive Cash Value = Asset Account is in a Debit Position
Negative Cash Value = Asset Account is in a Credit Position

A positive value in a liability account = the account is in its natural credit position
A negative value in a libility account = the account is in an unnatural debit position

Positive Accounts Payable = Liability Account is in a Credit Position
Negative Accounts Payable = Liability Account is in a Debit Position

Sample Accounting entry - Moving Balances In and Out of Accounts

Bob gets his company's $100 monthly phone bill

Dr Phone Expense 100
Cr Accounts Payable 100

Bob pays the bill

Dr Accounts Payable 100
Cr Cash Asset 100

Ending Account Balances

Phone Expense = 100______________Expense Account = + Value = Debit Position
Accounts Payable = 100-100 = 0______Liability Account = No Value = Credit Position
Cash Asset = -100________________ Asset Account = - Value = Credit Position

Explanation
Bob added the $100 balance to one account and subtracted it from another. The expense and liability accounts' ending balances were left in their natural positive positions, so their natural debit and credit positions did not change.
The ending cash (asset account) balance was negative and as a result its natural debit position changed to an unnatural credit position

See How To Job Cost

Accounting Money

Debit / Credit - How They Work in an Accounting Entry