What Credit (CR) and Debit (DR) Mean on a Balance Sheet

A few theories exist regarding the origin of the abbreviations used for debit (DR) and credit (CR) in accounting. Both have Latin roots. An increase in liabilities or shareholders’ equity is a credit to the account, notated as “CR.” A decrease is a debit, notated as “DR.”

Bookkeepers enter each debit and credit in two places on a company’s balance sheet using the double-entry method.

Key Takeaways:

• The terms debit (DR) and credit (CR) have Latin roots. Debit comes from the word debitum and it means, “what is due.” Credit comes from creditum, meaning “something entrusted to another or a loan.”
• An increase in liabilities or shareholders’ equity is a credit to the account. It’s notated as “CR.”
• A decrease in liabilities is a debit that’s notated as “DR.”
• Bookkeepers enter each debit and credit in two places on a company’s balance sheet using the double-entry method.

Understanding Debit (DR) and Credit (CR)

Luca Pacioli, a Franciscan monk, developed the technique of double-entry accounting. Pacioli is known as the “Father of Accounting” because the approach he devised became the basis for modern-day accounting. He warned that you should not end a workday until your debits equal your credits. This reduces the possibility of errors of principle.

Assets equal liabilities plus shareholders’ equity on a balance sheet or in a ledger using Pacioli’s method of bookkeeping or double-entry accounting. An increase in the value of assets is a debit to the account and a decrease is a credit.

Important

This method is also known as “balancing the books.”

Debit (DR) vs. Credit (CR)

The terms debit and credit both have Latin roots. The term debit comes from the word debitum, meaning “what is due.” Credit is derived from creditum, defined as “something entrusted to another or a loan.”

The change in the account is a debit when you increase assets because something (the value of the asset) must be due for that increase. An increase in liabilities is a credit because it signifies an amount that someone has loaned to you and which you used to purchase something (the cause of the corresponding debit in the assets account).

The terms debit and credit signify actual accounting functions, both of which cause increases and decreases in accounts depending on the type of account. Simply using “increase” and “decrease” to signify changes to accounts won’t work.

A few theories exist when it comes to the DR and CR abbreviations for debit and credit. One asserts that the DR and CR come from the Latin present active infinitives of debitum and creditum, which are debere and credere respectively. Another theory is that DR stands for “debit record” and CR stands for “credit record.” Some believe that the DR notation is short for “debtor” and CR is short for “creditor.”

Account Types

A company’s chart of accounts contains types of accounts. The balance sheet accounts include:

• Assets: The asset account contains a company’s resources such as cash, accounts receivable, and inventory.
• Liabilities: The liability account reflects what the company owes such as accounts payable and wages.
• Equity: Equity refers to company ownership such as in the form of stock and investment.

How Debits and Credits Affect Account Types

Every transaction that occurs in a business can be recorded as a credit in one account and a debit in another. Whether a debit reflects an increase or a decrease and whether a credit reflects a decrease or an increase depends on the type of account.

Examples of Debits and Credits

Say Company XYZ issues an invoice to Client A. The company’s accountant records $1,000, the invoice amount as a debit or DR in the accounts receivables section of the balance sheet because that is an asset account. The company records that same amount again as a credit or CR in the revenue section.

The accountant records the amount as a credit (CR) in the accounts receivables section, showing a decrease, when Client A pays the invoice to Company XYZ. A debit (DR) is recorded in the cash section, showing an increase.

Why Is Debit a Positive?

A debit on a balance sheet reflects an increase in an asset’s value or a decrease in the amount owed (a liability or equity account). This is why it’s a positive.

Is Accounts Payable a Credit or a Debit?

Accounts payable is a type of liability account that shows money that has not yet been paid to creditors. An invoice that hasn’t been paid increases accounts payable as a credit. It’s a debit when a company pays a creditor from accounts payable, reducing the amount owed.

Does Debit Go on the Left or the Right?

Debit, or DR, is entered on the left in traditional double-entry accounting. Credit, or CR, is entered on the right.

The Bottom Line

CR is a notation for “credit” and DR is a notation for debit in double-entry accounting. Credit is a term that’s used to mean “what is owed” and debit means “what is due.” Understanding how to use CR and DR will help you make sense of a company’s balance sheet and gain useful insight into the increases and decreases of key accounts.

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