Debits and credits — the rules that don't change — Accounting Module 4

The single hardest moment in accounting is when 'credit' stops meaning 'money in your bank account' and starts meaning 'the right-hand side of a journal entry'. The everyday meaning is misleading and you must let it go.

The rule, in five lines

DEAD CLIC

DEBITS increase: Expenses, Assets, Drawings. CREDITS increase: Liabilities, Income, Capital. The opposite side decreases each. Memorise it now. Recite it weekly until automatic. There is no shortcut — every accountant carries DEAD CLIC for the rest of their career.

Why this is the way it is

Recall the accounting equation: Assets = Liabilities + Equity. Assets are on one side; Liabilities and Equity on the other. Accountants chose, by historical convention, to call increases on the left side 'debits' and increases on the right side 'credits'. So:

Assets (left side of equation) — debits increase, credits decrease.
Liabilities (right side) — credits increase, debits decrease.
Equity / Capital (right side) — credits increase, debits decrease.
Revenue / Income (right side — increases equity through retained earnings) — credits increase.
Expenses (left side — decreases equity through retained earnings) — debits increase. So debiting an expense reduces retained earnings on the right side.
Drawings / dividends (left side — distributions to owners, reducing equity) — debits increase.

Worked example with debits and credits

text

Transaction: Buy KES 50,000 of inventory on credit (30-day terms)

  DEBIT  Inventory      KES 50,000   ← asset goes up
  CREDIT Accounts Payable KES 50,000  ← liability goes up

  (Note: this 'credit' is the journal-entry side. Has nothing to do
   with 'buying on credit' which is the colloquial term for a deferred
   payment arrangement — that's why English is confusing.)

Transaction: Pay the supplier 30 days later, KES 50,000 cash

  DEBIT  Accounts Payable KES 50,000  ← liability goes down
  CREDIT Cash             KES 50,000  ← asset goes down

Transaction: Sell inventory that cost KES 30,000 for KES 80,000 cash

  DEBIT  Cash             KES 80,000  ← asset up
  CREDIT Sales Revenue    KES 80,000  ← income up (equity up)

  DEBIT  Cost of Goods Sold KES 30,000 ← expense up (equity down)
  CREDIT Inventory          KES 30,000 ← asset down

Net effect on equity: +80,000 − 30,000 = +50,000 (the gross profit)

Three transactions, six journal entries. Each one is two-sided and balances.

The most common mistake

When the bank statement says 'CREDITED your account KES 5,000', that's the BANK's bookkeeping, not yours. From their perspective, they owe you more, so credit increases their liability to you. From YOUR perspective, your cash (asset) went up — so YOUR journal entry is a DEBIT to cash. This bank-statement confusion catches everyone the first dozen times. The bank's 'credit' = your 'debit'. Be very careful when reading bank statements vs your own books.

Exercise

Record the journal entries for: (1) The owner contributes KES 1,000,000 cash to start a business. (2) The business pays KES 80,000 cash for the first month's rent. (3) The business buys a delivery van for KES 600,000, paying KES 100,000 cash and signing a KES 500,000 loan.