Debits and credits DC ADE LER

Is there any easy way to remember what goes to debit or credit in accounting? Yes! The easiest way to remember debits and credits is ADE LER. Some teachers will tell you to “just memorize it”. In this video, we discuss how DC ADE LER works, with examples, so you actually understand what is going on! You will see that there is a big difference between memorizing and understanding #debitsandcredits

⏱️TIMESTAMPS⏱️
0:00 Introduction to debits and credits
0:31 DC ADE LER
1:07 Accounting equation
1:21 Debits and credits for assets
1:42 Debits and credits example: inventories
2:30 Debits and credits for liabilities
2:50 Debits and credits example: accounts payable
3:44 Journal entry debit credit
4:24 Debits and credits for equity

The starting point is: where is the normal balance of an account? DC ADE LER tells you: debits on the left, credits on the right. ADE is on the debit side, on the left: Assets, Dividends, Expenses. LER is on the credit side, on the right: Liabilities, Equity, Revenue. Instead of dividends, some people use the broader term drawings.Debits and credits are fundamental to accounting. To understand DC ADE LER, you need to go step by step. We start off with half the terms. Focus first on understanding the accounting equation: assets equal liabilities plus equity. This is sometimes also called the balance sheet equation.

Assets are things that a company owns. OWN. How do assets increase? How do assets decrease? The normal balance of an asset account is debit. Asset accounts increase by recording more debits to it, and decrease by recording credits to it.

Liabilities are things that a company owes. OWE. How do liabilities increase? How do liabilities decrease? The normal balance of a liabilities account is credit. Liability accounts increase by recording more credits to it, and decrease by recording debits to it.

Now for the second half of DC ADE LER. The other three letters that we have not covered yet are all connected with the E of Equity. Equity is also called shareholders’ capital. In a way, this is the amount owed to shareholders. The main driver of income in most companies is revenue. The normal balance for revenue is a credit. This is directly connected to the fact that if companies earn revenue, then the shareholders benefit from this, and equity goes up. However, in order to earn that revenue, companies incur expenses (cost of goods sold, operating expenses, etcetera). The normal balance for an expense is a debit. This is directly connected to the fact that if companies incur expenses, then the shareholders get “hurt” by this, and equity goes down. In reality, it is the difference between revenue and expenses that shareholders look at. If revenues are bigger than expenses, then the company makes a profit, and equity increases. If revenues are smaller than expenses, then the company makes a loss, and equity decreases. Profitable companies could consider paying a dividend to shareholders, a distribution of the profit. This would decrease equity. As the normal balance for equity is a credit, a debit through dividends would reduce it.

Debits and credits. DC ADE LER. Memorize it, and understand it!

Need another explanation of how DC ADE LER works? Here's how Jonathan Dorn explains it:    • Accounting for Beginners #1 / Debits ...  

Philip de Vroe (The Finance Storyteller) aims to make #accounting , finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!