principle of debit and credit

Principles or Rules of Debit and Credit Each transaction consists of debits and credits and for every transaction, they must be equal. For Every Transaction Value of Debits = Value of Credits This also means that in the accounts the total value of debits will equal the total value of credits. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits. The extended accounting equation must also balance: A + E = L + OE + R (where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues) So Debit Accounts (A+E) = Credit Accounts (L+OE+R) Debits are on the left and increase a debit account and reduce a credit account. Credits are on the right and increase a credit account and decrease a debit account. [1] Examples when you pay rent with cash: you increase rent (expense) by debiting and decrease cash (asset) by crediting. Account Debit Credit 1. rent 100 cash 100 when you receive cash for a sale: you increase cash (asset) by debiting and increase sales (revenue) by crediting. Account Debit Credit 2. cash 400 sale 400 when you buy equipment(asset) with cash: you increase equipment (asset) by debiting and decrease cash (asset) by crediting. Account Debit Credit 3. equip. 500 cash 500 when you borrow cash with a loan: you increase cash (asset) by debiting and increase loan (liability) by crediting. Account Debit Credit 4. cash 1000 loan 1000 The notion of debits and credits can be related to the fundamental accounting equation.  Consider both of the following observations: Assets = Liabilities + Owners' Equity and Debits = Credits These concepts can be merged to note: Assets (Debits) = Liabilities (Credits) + Owners' Equity (Credits)   For example, consider the impact of an owner investment on the fundamental accounting equation: Assets (+ or debited) = Liabilities + Owners' Equity (+ or credited)   As you will soon learn, it is customary for accountants to record this transaction as follows:   Date Accounts   Debits Credits 1-1-X3 Cash   25,000               Capital Stock     25,000   Issued stock to shareholders, in exchange for cash       It is a standing convention that debits are recorded to the left (in a sense, this corresponds to the idea that assets are usually on the left-hand side of a balance sheet).  Conversely, credits are indented to the right.