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Debit and Credit Theory
Debit and Credit Theory
• Do not be confused by the cards you have in your wallets and purses.
• In accounting, Debit refers to the LEFT side of an account and Credit refers to the Right side. Every account is described this way.
Debit and Credit Theory
• Debit comes from debere in Latin. It means to owe. Credit comes from credere which means to trust or believe.
• These lead to words like “debt” and “in debt,” which sound bad and words like “credible” and “credentials” which sound good.
• So, asset accounts have the values on the left (debit) side and liability accounts have the values on the right (credit) side.
• Therefore, asset accounts have debit values, liability accounts have credit values.
The Rules of Debit and Credit
Applying the Rules of Debit and Credit
• Transaction 1 – The company purchases$200 worth of supplies from PackhamProducts, to be paid for later.
• Step 1: Names of affected accounts.
Applying the Rules of Debit and Credit
• Step 2: What kind of account?
• Step 3: Increase or decrease?
Applying the Rules of Debit and Credit
• Step 4: Debited or credited?
• Step 5: Value of change?
Applying the Rules of Debit and Credit
• The last step completes the Accounting Entry for that transaction.
• The Accounting Entry can be defined as all of the changes in the accounts caused by one business transaction. We write in terms of debits and credits.