When do you use a “debit” vs. a “credit”?

Debit vs Credit

Law firms use standard accounting methods and rely on [simple_tooltip content=’Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account.’]double-entry[/simple_tooltip] bookkeeping to ensure the accuracy of their financial records.^[1] Double-entry bookkeeping systems use journal entries that contain at least one debit and one credit to record a business transaction onto the firm’s books.^[2]^[3] The accuracy of each journal entry depends upon your bookkeeper’s ability to determine which part of the transaction is recorded as a debit and which part is recorded as a credit.

Your bookkeeper should use a [simple_tooltip content=’A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account.’]debit[/simple_tooltip] when recording an increase to a draw, asset, expense, or loss [simple_tooltip content=’An account refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries.’]account[/simple_tooltip] or when recording a decrease in a [simple_tooltip content=’A gain is the increase in net profit resulting from something other than the day to day earnings from recurrent operations, and are not associated with investments or withdrawals.’]gain[/simple_tooltip], [simple_tooltip content=’Income is the revenue a business earns from selling its goods and services.’]income[/simple_tooltip], [simple_tooltip content=’In accounting, revenue is the income that a business have from its normal business activities, usually from the sale of goods and services to customers.’]revenue[/simple_tooltip], [simple_tooltip content=’Liabilities are defined as a company legal financial debts or obligations that arise during the course of business operations.’]liability[/simple_tooltip], or [simple_tooltip content=’Equity is defined as the owner interest in the company assets. In other words, upon liquidation after all the liabilities are paid off, the shareholders own the remaining assets.’]equity account[/simple_tooltip].^[4]^[5] Your bookkeeper should use a [simple_tooltip content=’A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account.’]credit[/simple_tooltip] when recording an increase in a gain, income, revenue, liability, or equity account, or when recording a decrease in a draw, asset, expense, or loss account.^[4]^[5]

Because this can be complicated and confusing, many accountants and bookkeepers use a visual aid, called a T-account to help them determine which accounts are to be debited and which are to be credited.^[6]

Let’s use a simple transaction for as an example: receipt of a $100 payment from a client. This payment makes your revenue go up by $100, but it also makes your bank account balance go up by $100 once it is deposited. So, in order to make an accurate journal entry for this transaction, you have to know which general ledger account gets debited and which gets credited.

Since your bank account goes up when you deposit the payment, you need your bank asset account to increase in order to accurately reflect the deposit. Asset accounts increase when debited, so you will need to debit your bank asset account by $100. That takes care of the debit portion of the journal entry, but now you need to determine what the credit portion of the journal entry should look like. Since the $100 payment is revenue to your firm, your revenue also increases by $100. Revenue accounts increase when credited, so to balance out the journal entry, you will need to credit your revenue account $100. The T-account visual aid for this transaction would look like this:

ABC Bank Account

Debit	Credit
100

Revenues

Debit	Credit
	100

This is an example of a simple journal entry where you only had to debit one account and credit one account. In situations where you may need to make a more complicated, [simple_tooltip content=’A compound entry is simply a combination of two or more simple journal entries but instead of recording numerous simple journal entries it is better to record journal entries of single accounting event as a compound entry.’]compound entry[/simple_tooltip] – an entry where you debit more than one account or credit more than one account – this process can be even more complicated and confusing. In either case, it is best to have an experienced bookkeeper or accountant record your law firm’s business transactions into your accounting program in order to ensure the accuracy of your financial records.