Debits (Dr.) and credits (Cr.) are used to ensure inflows and outflows of transactions (assets/liabilities) are always balanced.
In order balance journal entries, certain types of accounts will increase with debits and decrease with credits, while others increase with credits and decrease with debits. A simple diagram can be found below.
Each transaction will have a have both a debit and a credit journal entry. This forms the basis of "double-entry bookkeeping".
It can be difficult to remember which accounts should use debits and which use credits for an increase or a decrease. A simple trick is to consider everything in terms of how the transaction affects our cash balance. If you can remember that an increase in cash is recorded as a debit (and decrease is a credit), then we simply need to figure out how to balance the remainder.
For example:
We paid cash for our new car. Cash decreased (Cr.) -> to balance we must Debit the Asset. This reminds us that Debits are used to increase Assets.
We took out a line of credit, and got cash in return. Cash increased -> to balance we must Credit the Liability. This helps us remember that Credits are used to increase Liabilities.
We paid cash to cover a building expense. Cash decreased -> to balance we must debit the Expense account. Expenses are increased using Debits.
Customer paid us cash for our services. Cash increased -> to balance we must credit the Revenue account. This helps us remember that Credits increase our Revenue account.
The company issued shares (ownership interest in the company), in return for cash from its new shareholders. Credits increase our equity accounts.
The company increased revenues, and with that, cash on hand, therefore increasing retained earnings. This helps us remember that Retained Earnings are increased with Credits.
The last journal entry is unlikely to occur in real life, because an increase in cash is usually associated with an increase in Revenue (Cr.), or something else before anything is transferred to Retained Earnings. But it is helpful for illustrative purposes in order to remember which accounts increase with debits and which increase with credits.
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