Should I use debit or credit?
Can’t figure out whether to use a debit or credit for a particular account? The balance sheet formula should give you the answer. The equation is comprised of assets (debits) which are offset by liabilities and equity (credits). You’ll know if you need to use a debit or credit because the equation must stay in balance.
Learn more details about the elements of a balance sheet below.
Balance sheet formula
A balance sheet reports your firm’s assets, liabilities, and equity as of a specific date. Here are the components of a balance sheet:
- Assets: what your business owns
- Liabilities: what your business owes to other parties
- Equity: the difference between assets and liabilities, or the true value of your business
The components are connected by the balance sheet formula (or accounting equation):
Assets = liabilities + equity
The formula is used to create the financial statements, and the formula must stay in balance.
How to do a balance sheet
Assets on the left side of the equation (debits) must stay in balance with liabilities and equity on the right side of the equation (credits).
Assume, for example, that a firm issues a $10,000 bond and receives cash. The company posts a $10,000 debit to cash (an asset account), and a $10,000 credit to bonds payable (a liability account).
Here’s the impact on the balance sheet formula:
$10,000 increase assets = $10,000 increase liabilities + $0 change equity
Implementing accounting software can help ensure that each journal entry you post keeps the formula and total debits and credits in balance.