Lesson 3 of 9
The convention, plainly
Debit means left and credit means right. Which accounts increase on which side, why, and why no mnemonic is needed once the equation is in front of you.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Debit means left and credit means right. Neither word means good, bad, increase or decrease.
- Assets and expenses increase on the left. Liabilities, equity and revenue increase on the right. That follows from the equation and needs no memorising.
- Every entry has equal totals on both sides, which is where the self-checking property of the method comes from.
Two words cause more confusion in accounting than the rest of the vocabulary combined, and the reason is that both have a second meaning in ordinary English. A bank "credits" your account and you are better off. An accountant credits an account and it might mean anything.
Set the ordinary meanings aside completely. In bookkeeping, debit means the left side of an entry and credit means the right side. That is the whole definition.
Which side increases which account
Increases with a debit, on the left
- Assets: cash, receivables, materials, equipment.
- Expenses: wages, rent, depreciation, interest.
Increases with a credit, on the right
- Liabilities: payables, loans, deferred revenue.
- Equity: share capital, retained earnings.
- Revenue: sales.
Read it off the equation rather than memorising it: the left of the equation increases on the left of an entry.
Why the rules go that way
Write the equation with assets on the left and everything else on the right.
Assets sit on the left of the equation, so an asset increases with a left-side entry, which is a debit. Liabilities and equity sit on the right, so they increase with a right-side entry, which is a credit.
Revenue and expenses are not separate from that. Revenue increases equity, so it behaves like equity and increases on the right. An expense reduces equity, so it behaves like the opposite of equity and increases on the left.
That is the entire rule. There are mnemonics taught for this and none of them is necessary, because the equation is short enough to write out each time until it becomes automatic.
Reading the convention on the bindery's books
Where the words came from
The method is often dated to 1494, and the date is right while the usual claim about it is not. Luca Pacioli's Summa de Arithmetica, Geometria, Proportioni et Proportionalita, printed in Venice that year, contains a section setting out double-entry bookkeeping in detail.
Pacioli described a practice that Venetian and Genoese merchants were already using rather than inventing one. What the book did was write the method down clearly enough for it to spread, which is a different and more interesting achievement.
The Latin roots are the reason the words feel backwards. Debit comes from "debere", to owe, and credit from "credere", to entrust. In a merchant's ledger of who owed what to whom, those made sense. In a modern ledger of assets and expenses they are simply the names of two columns.
The property that makes the method work
Because every entry puts the same total on both sides, the sum of all debits in a complete set of books equals the sum of all credits. Always, with no exceptions and no judgement involved.
That gives a mechanical test that can be run at any time, which is the trial balance in lesson six. It does not prove that the books are right. It proves that they are internally consistent, and it catches a large class of ordinary mistakes before anything is published.
Check yourself
What does 'credit' mean in bookkeeping?
- An increase
- Something favourable
- The right side of an entry, nothing more
Show the answer
Answer: C.
Debit is left and credit is right. Whether either represents an increase depends entirely on which type of account it lands in.A company pays $45,000 of wages in cash. Which account is credited?
- Wages expense
- Cash, because an asset fell and assets increase on the left
- Retained earnings
Show the answer
Answer: B.
Wages expense is debited because expenses increase on the left. Cash is credited because it decreased, and a decrease in an asset is a right-side entry.Why do revenue accounts increase with a credit?
- By arbitrary convention
- Because revenue increases equity, and equity sits on the right of the accounting equation
- Because revenue is a liability
Show the answer
Answer: B.
Revenue is a route by which equity rises, so it follows equity's side. An expense reduces equity and therefore takes the opposite side.Sources
- Luca Pacioli, Summa de Arithmetica, Geometria, Proportioni et Proportionalita, Venice, 1494, for the earliest widely circulated printed description of double-entry bookkeeping. The book describes the practice of merchants of the period rather than introducing it.
What this leaves out
- Fen Street Bindery and every figure here are invented, chosen so the arithmetic can be checked by hand.
- Contra accounts such as accumulated depreciation and treasury stock sit inside a category and carry the opposite balance to it. They appear in lesson seven rather than here.
- The claim about 1494 is a claim about a printed book, not about the origin of the method, which predates it in merchant practice.
- Nothing here is advice about any security.