Most business transactions have two sides such as the buyer and the seller. In other words, the business sells a product to a customer who buys the product. In order for a company to be able to keep track of transactions, most use a system called double-entry bookkeeping. Double-entry bookkeeping requires a recording system using debits and credits.
Debits and credits are the two balancing aspects of every financial transaction in double-entry bookkeeping. According to Wikipedia, debits and credits are entries made in account ledgers to record changes in value due to business transactions. Generally speaking, the source account for the transaction is credited (entry made at the right of the ledger) and the destination account is the debited (an entry made on the left). The difference between the total debits and total credits in a single account is the balance. If debits exceed credits, the account has a debit balance. On the other hand, if credits exceed debits, the account has a credit balance. For a company, the totals of debit balances and credit balances must be equal as shown in the reports; otherwise, it means that an error has occurred.
According to David Friedman, an academic economist, the essence of double entry bookkeeping is that every item appears twice, once on the left side and one on the right. For example, if you buy some oil, the reduction in cash is your credit while the increase in your inventory is your debit. The inventory is debited because it is an asset account that increases in this transaction and the payment is credited as a liability account that increases since the transaction was on credit. However, in this case, the two amounts are equal because accountants measure the value of something (the oil), by what you paid for it.
Traditionally, debits and credits are hard to understand. In fact, according to Friedman, they may mean the opposite of what they should. For example, an increase in assets is a debit, a decrease in assets (or an increase in liabilities) a credit. In most cases, revenue is credit while expenses a debit. In other words, debit is all the expenses and losses, while credit is all incomes and gains.
To put it simply, according to Accountingcoach.com, DEAL accounts are increased with a debit: Dividends (Draws), Expenses, Assets, Losses. On the other hand, GIRLS accounts are increased with a credit: Gains, Income, Revenues, Liabilities, Stockholders’ (owners’) equity.
Ultimately, debits and credits are a bit confusing and it would take numbers of practices of bookkeeping to fully understand what these terms mean and how they go together.