Debits and Credits
Debits and credits are used to record financial transactions. Debit is the left side of an account. Credit is the right side of an account. Using the acronym DEALER helps to remember accounts with debit and credit balances. Debits must always equal credits.
- Accounts with debit balances take a debit to increase and a credit to decrease. DEA: Dividends, Expenses, and Assets
- Accounts with credit balances take a credit to increase and a debit to decrease. LER: Liabilities, Equity, and Revenue.
Dividends are distributions of earnings to stockholders. It is based on the number of shares owned. The most common type is a cash dividend. Dividends can be issued in the form of additional stock to stockholders, called a stock dividend.
Double Entry Accounting
Double entry accounting has the following basic rules:
- Every transaction affects at least two accounts with at least one debit and one credit.
- Debits must always equal credits.
- Debits and credits add or subtract from each account.