Understanding Debits and Credits in Accounting

Overview

• DC, ADE, LER is a mnemonic to understand debits and credits.
  • Debits on the Left, Credits on the Right.
  • ADE on the debit side (Assets, Dividends, Expenses).
  • LER on the credit side (Liabilities, Equity, Revenue).
• Emphasizes understanding over memorization.

Accounting Equation

• Assets = Liabilities + Equity (Balance Sheet Equation).
• Assets: Things a company owns.
  • Increase by debiting.
  • Decrease by crediting.
• Liabilities: Things a company owes.
  • Increase by crediting.
  • Decrease by debiting.

Examples

Assets

• Inventory: An asset account.
  • Begins with debit balance.
  • Receives inventory = Debit increase.
  • Ships product = Credit decrease.
  • Example Calculation:
    • Opening balance: 100 Debit
    • Add receipts: 50 Debit
    • Deduct shipments: 30 Credit
    • New balance: 120 Debit

Liabilities

• Accounts Payable: A liabilities account.
  • Begins with credit balance.
  • New invoices = Credit increase.
  • Payments to suppliers = Debit decrease.
  • Example Calculation:
    • Opening balance: 200 Credit
    • Add invoices: 50 Credit
    • Deduct payments: 70 Debit
    • New balance: 180 Credit

Transaction Analysis

• Example: Inventory receipt not immediately paid.
  • Journal Entry:
    • Debit Inventory 50
    • Credit Accounts Payable 50
• Every transaction balances out: Total debits = Total credits.

Equity and Related Accounts

• Equity: Shareholders' capital.
• Revenue: Main income driver, normal credit balance.
• Expenses: Costs incurred, normal debit balance.
  • Profit increases equity.
  • Loss decreases equity.
• Dividends: Profits distributed to shareholders, decrease equity.

Conclusion

• Memorize and understand DC, ADE, LER for effective accounting practice.