While there isn't a universally agreed-upon list of "7 rules" of debit and credit, the following principles encompass the core understanding of how debits and credits work in accounting:
Core Principles of Debits and Credits
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The Accounting Equation is the Foundation: Debits and credits are built upon the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always balance, and debits and credits are the mechanism that ensures this balance.
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Debit What Comes In, Credit What Goes Out (for assets): When dealing with assets, a debit increases the asset account (what the company receives or controls), while a credit decreases the asset account (what the company gives up or relinquishes control of). For example, if a company buys equipment, the Equipment account (an asset) is debited, and the Cash account (another asset) is credited if cash was used to purchase it.
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Debit Left, Credit Right: This is a simple mnemonic, but crucial. In a T-account or journal entry, debits are always recorded on the left side, and credits are always recorded on the right side.
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Debit Increases Assets and Expenses: Generally, debit entries increase the balance of asset and expense accounts. Expenses represent the cost of resources consumed in generating revenue.
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Credit Increases Liabilities, Equity, and Revenue: Generally, credit entries increase the balance of liability, equity, and revenue accounts. Liabilities represent obligations to others, equity represents the owners' stake in the company, and revenue represents income earned.
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Opposite Actions Require Opposite Entries: If you increase an asset with a debit, you'll likely need to decrease another asset, or increase a liability or equity account with a credit, to keep the accounting equation in balance. Every transaction affects at least two accounts.
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Debit and Credit Must Balance (Always): The total dollar amount of debits in any journal entry must equal the total dollar amount of credits. This ensures that the accounting equation remains in balance after each transaction is recorded. If debits don't equal credits, something is incorrect.
