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

CosmoLex Team

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Law firms use standard accounting methods and rely on double-entry 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 debit when recording an increase to a draw, asset, expense, or loss account or when recording a decrease in a gain, income, revenue, liability, or equity account.[4][5] Your bookkeeper should use a credit 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, compound entry – 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.


References

1. Double Entry Accounting
2. What is the double entry system?
3. Double entry accounting
4. Debits and Credits (Explanation)
5. Debit and Credit Definitions
6. Debits and Credits (Explanation 2)