How to Tell Debit From Credit
- 1). Know the effect of debits. Debit entries increase assets and reduce liabilities and/or an owner's equity. For example, if you have a mortgage on your home, the house is the asset and the mortgage is the liability. When you make a payment, the loan amount for your mortgage (liability) decreases, while your ownership of your home (asset) increases.
- 2). Understand the effect of credits. Credit entries are the opposite of debits where they decrease assets and increase liabilities and/or owner's equity. Using the example in Step 1, the asset as it pertains to credits is your bank account and the liability is the mortgage loan. When you make the mortgage payment your bank account (asset) decreases while the equity in your house (owner's equity) increases.
- 3). Comprehend how to make debit and credit entries. When you debit an account, the entry always goes on the left hand side of the ledger. When you credit an account, it goes on the right hand side.
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