Debits

Definition

Debits are the left-hand side entries in an accounting transaction, representing increases in assets or decreases in liabilities and equity. They are a fundamental concept in the double-entry accounting system, where every transaction is recorded with a debit and a corresponding credit entry.

5 Must Know Facts For Your Next Test

1. Debits increase asset accounts and decrease liability and equity accounts.
2. The left side of the accounting equation (Assets) is increased by debits, while the right side (Liabilities and Equity) is decreased by debits.
3. Debits are always recorded first in the accounting transaction before the corresponding credit entry.
4. Debits are used to record business transactions, such as the purchase of equipment or the payment of expenses.
5. The total of all debit entries must always equal the total of all credit entries in a balanced accounting system.

Review Questions

• Explain how debits relate to the principles, assumptions, and concepts of accounting and their impact on financial statements.
  • Debits are a fundamental concept in accounting that align with the principles of double-entry bookkeeping and the accounting equation. Debits increase asset accounts, which are reported on the left side of the balance sheet, and decrease liability and equity accounts, which are reported on the right side of the balance sheet. This direct impact on the financial statements is a critical component of understanding the relationship between debits, the accounting principles, and the presentation of a company's financial position.
• Describe the role of debits in the initial steps of the accounting cycle, such as analyzing and recording business transactions.
  • Debits are the first step in the accounting cycle when recording business transactions. Accountants must analyze each transaction to determine which accounts are affected and whether those accounts should be increased or decreased. Debits are used to increase asset accounts and decrease liability and equity accounts, providing the foundation for the double-entry system. Properly identifying and recording debits is essential in the initial steps of the accounting cycle, as these entries form the basis for all subsequent financial reporting.
• Analyze how debits, in conjunction with credits, impact the accounting equation and the resulting financial statements when recording business transactions.
  • Debits and credits work together to maintain the balance of the accounting equation (Assets = Liabilities + Equity). When a business transaction occurs, the accountant must determine the debit and credit entries that will keep the equation in balance. Debits increase assets or decrease liabilities and equity, while credits have the opposite effect. The careful analysis and recording of debits and credits ensures that the accounting equation remains balanced, which is essential for the accurate presentation of a company's financial statements, including the balance sheet, income statement, and statement of cash flows.

Related terms

Credits:

Credits are the right-hand side entries in an accounting transaction, representing decreases in assets or increases in liabilities and equity. They balance out the debit entries in the double-entry accounting system.

Double-Entry Accounting:

A system of accounting where every transaction is recorded with a debit and a corresponding credit, ensuring that the accounting equation (Assets = Liabilities + Equity) is always balanced.

Accounting Equation:

The fundamental equation in accounting that states that a company's assets are always equal to the sum of its liabilities and equity.