Debits and credits DC ADE LER

Understanding Debits and Credits in Accounting

• DC ADE LER: A mnemonic to remember which accounts have debits and which have credits.

  • Debits (Left Side): Assets, Dividends, Expenses (ADE)

  • Credits (Right Side): Liabilities, Equity, Revenue (LER)

Key Concepts

Normal Balance of Accounts

• Understanding the normal balance of accounts is crucial:

  • Debits are recorded on the left.

  • Credits are recorded on the right.

Accounting Equation

• The Fundamental Accounting Equation: Assets = Liabilities + Equity

  • Assets: Things a company owns (e.g., cash, inventory).

  • Liabilities: Things a company owes (e.g., loans, invoices).

  • Equity: Amount owed to shareholders.

Debits and Credits Explained

Assets (ADE)

• Normal Balance: Debit

• Increasing Assets: Record more debits.

• Decreasing Assets: Record credits.

• Example:

  • Inventory account starts with a balance of 100 debit.

  • Receives additional inventory of 50 debit (increases balance).

  • Ships out inventory worth 30 credit (decreases balance).

  • New balance = 100 + 50 - 30 = 120 debit.

Liabilities (LER)

• Normal Balance: Credit

• Increasing Liabilities: Record more credits.

• Decreasing Liabilities: Record debits.

• Example:

  • Accounts Payable has a starting balance of 200 credit.

  • Receives new invoices of 50 credit (increases balance).

  • Makes payments of 70 debit (decreases balance).

  • New balance = 200 + 50 - 70 = 180 credit.

Connecting Transactions

• Journal Entry Example:

  • When inventory worth 50 is received and not paid for:

    • Debit Inventory for 50 (increases assets).

    • Credit Accounts Payable for 50 (increases liabilities).

• Total Debits = Total Credits for each transaction.

Additional Components of DC ADE LER

Equity

• Normal Balance: Credit

• Represents the value owed to shareholders, linked with company profits/losses.

Revenue and Expenses

• Revenue (Credit): Increases equity as companies earn money.

• Expenses (Debit): Decreases equity as costs are incurred.

• Profit Measurement: Difference between Revenue and Expenses influences equity:

  • Profit (Revenues > Expenses): Increases equity.

  • Loss (Expenses > Revenues): Decreases equity.

Dividends

• Repayment to shareholders from profits, reducing equity.

  • Dividends (Debit): Decrease in equity, recorded as debits.

Conclusion

• Memorize and Understand: DC ADE LER not only helps memorize but also comprehend how each account type behaves in accounting transactions.