The next figure shows the same kind of relationship between the assets and liabilities accounts. If we add $100 to assets, the debits go up $100, and the credits go down $100. At the same time, in the liabilities account, debits go down $100 and credits go up $100.

The figure shows how an accountant would record four common transactions in terms of debits and credits:

The company borrows $8,000. Cash (an asset) is debited and Notes Payable (a liability) is credited.

The company sells $5,000 in merchandise on credit. Sales Income (an income account) is credited and Accounts Receivable (an asset) is debited.

The company pays its electricity bill of $200 immediately. Utilities Expense (an expense account) is debited and Cash (an asset) is credited.

The company sells some of its older computers for $1,500. Office Equipment (an asset) is credited and Cash (an asset) is debited.

Simple as it should be, the concept of debits and credits is a little like a Zen koan (a paradox). Terms are easily defined, but how they integrate into your balance sheet and income statement and the effect they have on your accounts… Well, that’s not so clearly understood without first understanding how liabilities and owners’ equity are treated in relation to assets. That may take a little getting used to.