Debits

Debits, in accounting, represent increases in asset accounts, decreases in liability and owner's equity accounts. They are recorded on the left-hand side of a general ledger account. Debits essentially track the flow of financial resources out of an entity or a decrease in the entity’s obligations. They are counterbalanced by credits to maintain the fundamental accounting equation: Assets = Liabilities + Equity. Understanding Debits is crucial for accurate financial record-keeping and analysis.

Debits meaning with examples

• The business purchased new equipment, causing a debit to the 'Equipment' asset account. Simultaneously, to balance the equation, the money came from the 'Cash' account, resulting in a credit. This shows an increase in assets. Therefore, the debit accurately reflected the increase in equipment's value and recorded the outflow of cash.
• When a customer fails to pay an invoice, the business records a 'Debit' to 'Accounts Receivable,' which is also an asset account, because the debt isn't yet recovered. A 'Credit' must go somewhere to balance this change. The 'Credit' could go to an 'Allowance for Doubtful Accounts,' as the company anticipates the uncollectible debt will not be received.
• If a company pays its rent expense, a 'Debit' is applied to the 'Rent Expense' account and a 'Credit' is applied to the 'Cash' account, because money is being removed. This increases the 'Rent Expense', which eventually reduces owner's equity. The debit accurately reflects the expenses.
• When a company declares and pays a dividend to shareholders, it records a debit to 'Retained Earnings' or 'Dividends' (depending on accounting methodology) and credits the 'Cash' account. This 'debit' decreases the owners' equity, reflecting the distribution of profits.