How are debits and credits defined in accounting?

In accounting, debits and credits are fundamental components of the double-entry accounting system. This system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced after each transaction. Debits and credits serve opposite functions in this system.

Entries to the left side of an account are classified as debits. When you increase assets or expenses, you do so by debiting the account. Conversely, when you decrease liabilities, equity, or revenue, you also use debits. This creates a clear relationship between the sides of the accounts, supporting the integrity of financial reporting.

On the right side, entries are classified as credits. Credits increase liabilities, equity, or revenue accounts, and decrease asset or expense accounts. By maintaining this structure, every transaction will have at least one debit and one credit, keeping the accounting records balanced and allowing for accurate financial statements.

This clear definition ensures that anyone reading the books can understand how changes to accounts affect the overall financial position of the entity.