Small Business Accounting- Debits and Credits

In accounting, T-accounts are used to track economic activity within the business. A T-account is an individual record of an increase/decrease in an asset, liability, stockholder’s equity, revenue, or expense. Each T-account consists of three parts: the title of the account, a debit, and a credit. A debit is the left side of the account. A credit is the right side of the account. In this post, we will discuss debits, credits, and recording economic events within a business.

Here is an example of a T-Account:

Notice that the title of the account is at the top (Supplies). In this example, $500 has been debited to the supplies account. In accounting, it’s important to understand that debits and credits do not mean increase and decrease. They simply mean making changes to a specific account (a liability or asset). Debits increase assets and decrease liabilities. Credits decrease assets and increase liabilities. So entering an amount on the left side of an account is called debiting the account, while making an entry on the right side is called crediting the account.

Let’s look at an example of a T-account, using an accounting transaction. Let’s say that XYZ Inc purchased office supplies (an asset) with cash (another asset) for $500. In order to record this event, we would use a T-account. Since office supplies are assets, and assets have increased, we would debit the supplies account and credit the cash account, resulting in a T-account that looks like this:

Supplies                                                                                               Cash

DR (debit)                           CR (credit)                                           DR (debit)                           CR (credit)

$500                                                                                                                                                       $500

Since debiting an asset increases it, we debited the supplies account and increased supplies by $500. Since crediting an asset decreases it, we credited the cash account, therefore decreasing cash by $500.

* Learn more about debits and credits and accounting in general in our Accounting tutorial.