Key Concepts
Every business transaction affects at least two accounts. For every amount debited to one account, an equal amount must be credited to another. This ensures the accounting equation stays balanced at all times.
Golden rule: Total debit value = Total credit value (in every transaction)
Whether to debit or credit depends on the element of the account and whether it is increasing or decreasing:
| Element | To increase | To decrease |
|---|---|---|
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Equity / Capital | Credit | Debit |
| Income | Credit | Debit |
| Expenses | Debit | Credit |
| Drawings | Debit | Credit |
Recall DEAD CLIC from Chapter 3 — the first letter is the side (Debit / Credit); the remaining letters are the elements that increase on that side:
| Debit balance | Credit balance |
|---|---|
| Expenses | Liabilities |
| Assets | Income |
| Drawings | Capital (Equity) |
Expenses, assets and drawings increase with a debit; liabilities, income and capital increase with a credit. To decrease any of them, use the opposite side.
Note:Cost of sales is an expense — it increases on the debit side, just like any other expense. It sits under the E of DEAD, not in CLIC.
Applying the Rules to a Transaction
- Identify the accounts affected — which accounts does this transaction affect?
- Classify each account — is it an asset, liability, income, expense, drawings, or capital?
- Did each account go up or down? — determine the direction of change for each account.
- Decide debit or credit:
- Account increases and normally carries a debit balance (assets, expenses, drawings) → debit it.
- Account increases and normally carries a credit balance (liabilities, income, capital) → credit it.
- Account decreases → use the opposite side.
- Check — total debits must equal total credits.
| Account | Element | Effect | Debit / Credit |
|---|---|---|---|
| Inventory | Asset | Increases | Debit $6,000 |
| Trade payables — Arjun | Liability | Increases | Credit $6,000 |
Total Debit ($6,000) = Total Credit ($6,000) ✓
Debiting a liability when it increases. Liabilities are credit-natured. When the business owes more money, the liability increases, so it is credited — not debited.
Treating drawings as an expense. Drawings is a reduction of equity, not an operating expense. Use the Drawings account, not any expense account. Because Drawings reduces equity (which is credit-natured), Drawings is debit-natured — debit to increase, credit to decrease.
Debiting income when the business earns revenue. Income accounts increase on the credit side. When Sales revenue is earned, credit it — not debit it.