When people hear the words DEBITS and CREDITS, their eyes start to glaze over. Which part of the transaction should be a debit and which one should be a credit? Does it really matter?! What happens if I don't care?

This reminds me of an experience from my LDS mission in Chihuahua, Mexico. In 1993, I had a Mexican missionary companion that wrote something down for me and misspelled a word or two. He used a "v" instead of a "b". These two consonants sound very similar in Spanish, but it still surprised me that this very intelligent young man made this error. His reply went something like this: "There are linguists who have theorized that one day spelling won't matter...as long as the idea is communicated." With a twinkle in my eye, I said, "Until that day comes, your spelling still counts, Elder."

Just like spelling matters in professional writing, debits and credits matter in accounting. For me, understanding debits and credits has unlocked the mystery of how the financial statements are tied together. Here's a little "cheat sheet" showing how different account types are affected by debits and credits. (Remembering the accounting equation of Assets = Liabilities + Owners Equity helps when deciding how to record a transaction)

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Assets
Debit = increase
Credit = decrease

Liabilities & Owners Equity
Debit = decrease
Credit = increase

Income Statement*
Debit = reduce bottom line
Credit = increase bottom line

* When considering transactions involving the Income Statement, remember that the bottom line flows into the equity section of the Balance Sheet as retained earnings. So, debits and credits on the Income Statement will behave the same as they do in the equity section of the Balance Sheet.

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Perhaps this will be my least-read post, but it should be the other way around. Here's hoping!