More on Debits and Credits

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

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These concepts can be merged to note:

Assets (Debits) = Liabilities (Credits) + Owners' Equity (Credits)

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For example, consider the impact of an owner investment on the fundamental accounting equation:

Assets (+ or debited) = Liabilities + Owners' Equity (+ or credited)

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As you will soon learn, it is customary for accountants to record this transaction as follows:

ACCOUNT: Cash
Date	Accounts	Debits	Credits
1-1-10	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.