Debits and credits DC ADE LER

Introduction

This tutorial focuses on understanding debits and credits in accounting using the mnemonic DC ADE LER. By grasping this concept, you will improve your accounting skills and gain a clearer understanding of financial statements, making it easier for you to engage in discussions about finance and investing.

Step 1: Understand the Accounting Equation

• The accounting equation is fundamental: Assets = Liabilities + Equity.
• This equation emphasizes that what a company owns (assets) is financed either through borrowing (liabilities) or through shareholders' investments (equity).

Step 2: Learn the DC ADE LER Mnemonic

• DC ADE LER helps you remember what accounts increase with debits or credits.
• ADE (Assets, Dividends, Expenses) are on the debit side (left).
• LER (Liabilities, Equity, Revenue) are on the credit side (right).

Step 3: Analyze Asset Accounts

• Assets are items a company owns.
• Normal balance: Debit.
• Increase assets: Record more debits.
• Decrease assets: Record credits.

Example

• If a company buys inventory, you would debit the inventory account to increase it.

Step 4: Analyze Liability Accounts

• Liabilities are obligations a company owes.
• Normal balance: Credit.
• Increase liabilities: Record more credits.
• Decrease liabilities: Record debits.

Example

• If a company takes out a loan, you would credit the loan account to increase it.

Step 5: Understand Equity Accounts

• Equity represents shareholders' interest in the company.
• Normal balance: Credit.
• Revenue increases equity and has a normal balance of credit.
• Expenses decrease equity and have a normal balance of debit.

Example

• If a company earns revenue, you would credit the revenue account. If it incurs expenses, you would debit the expense account.

Step 6: Explore Dividends

• Dividends are distributions of profits to shareholders.
• Normal balance: Debit (reduces equity).
• When dividends are declared, you debit the dividends account, reducing overall equity.

Conclusion

Understanding debits and credits through the DC ADE LER framework is crucial in accounting. By following these steps, you can effectively apply this knowledge in real-world financial situations, such as preparing financial statements or analyzing a company’s fiscal health. Consider practicing by analyzing sample transactions to reinforce your understanding.