Accounting Credits and Debits

A transaction which increases an asset account is called a debit or a charge and transaction which increases a liability account is called a credit.

Understanding Accounting Credits and Debits will definitely help you to understand financial statements better. Bookkeeping, accounting and financial statements are all based on the two basis concepts which is credit and debit.

A transaction which increases an asset account (or decreases a liability account) is called a debit or a charge.

A transaction which increases a liability account (or decreases an asset account) is called a credit. Since Capital and the various forms of Surplus are liability accounts, a transaction increasing these accounts are called credits and entries decreasing these accounts are called debits.

Double Entry Accounting

Business book are kept by what is called the "double entry accounting" system.

Business book are kept by what is called the "double entry accounting" system, under which every debit entry is accompanied by a corresponding credit entry. Hence the books are always kept in balance, meaning that the total of asset accounts always equals the total of liability account.

The ordinary operations of a business involve various income and expense accounts such as Revenue or Sales, Salaries paid etc... which do not appear in the Balance Sheet. These operating or intermediate accounts are transferred (or "closed out") at the end of the period into Surplus or into Profit and Loss.

Since the income entries are equivalent to additions to Surplus, they appear as credit or liability accounts. Expense entries, which are equivalent to deductions from Surplus, appear as debit or asset account.