To Debit or Not to Credit? Should That Be the Question?
Double-entry Accounting System | Debits & Credits
Written by: Simona Itkin & Torsor Kotee
The Value in Learning Debits and Credits
Debits and credits have long been fundamental to accounting, forming the backbone of the double-entry accounting system. This bookkeeping system ensures that every transaction is recorded in at least two accounts, with one side reflecting a debit and the other a credit. It has stood the test of time, used for centuries by businesses of all sizes to maintain balanced books.
For many instructors, teaching these concepts has been essential to helping students understand how transactions affect various financial accounts. The emphasis on debits and credits has helped students grasp the basic mechanics of journalizing and how companies track, manage their finances, and prepare financial statements.
With the advancements in accounting systems, the question arises: should debits and credits still be a central focus?
The Challenges and Limitations of Learning Debits and Credits
While these concepts are foundational to the double-entry accounting system, many students find it difficult to grasp how they work due to their abstract nature. For instance, in everyday life, a credit to cash is usually seen as a positive. However, in accounting, crediting the Cash account decreases your cash balance. This confusion is compounded by the number of accounts in which students have to remember their normal balances. It can be over 30+ accounts to remember. While hands-on activities like T-accounts are commonly used to reinforce the mechanics of debits and credits, they can also disengage students from the broader learning process and interest in accounting.
T-Accounts
Without a clear grasp of how debits and credits affect overall financial statements, students may find it difficult to see their importance beyond basic transaction recording. Technological advancements further challenge whether these concepts should remain a focus in today’s classroom. For instance, modern accounting software like Intuit automates many of the bookkeeping tasks traditionally tied to debits and credits. When creating a sales invoice, the software automatically generates the necessary journal entries. With the rise of generative AI, bookkeepers may soon only need to describe a transaction in natural language for an accounting system to record it accurately.
As the future of work evolves, accounting education should emphasize higher-order thinking skills. For example, analyzing and interpreting financial statements, rather than spending significant time on technical bookkeeping tasks. This shift highlights the need for teaching approaches that go beyond memorization, helping students master the broader implications of financial transactions.
How Educators Are Approaching This Challenge to Enhance Learning
With AI automating bookkeeping and students' struggles in accounting, educators are now adopting a systems thinking approach to help students see the bigger picture and understand accounting more holistically, making the learning process more intuitive and enjoyable. Here are a few ways accounting instructors are approaching the learning:
Start with the 5 Elements: One of the key strategies in this approach is focusing on the five elements of financial statements. Rather than overwhelming students with a long list of accounts, accounting instructors are concentrating on the building blocks of financial statements: assets, liabilities, equity, revenue, and expenses. By teaching students the normal balance for the 5 elements, educators equip them with a framework that simplifies the understanding of all other accounts. This structure allows students to see patterns and connections across the broader system of financial reporting.
Utilize the Accounting Equation: The accounting equation offers a clear and intuitive framework for understanding how every business transaction impacts the financial statements. Instead of focusing on whether an entry should be debited or credited, accounting instructors are using this equation to help students think about how transactions increase or decrease assets, liabilities, or equity. It’s a systems-level approach that helps students see the balance in the bigger financial picture.
For example, when a company borrows money, students can quickly see how the balance equation is affected—an asset increases and a liability increases. This shift in focus from “debiting” and “crediting” to understanding “increases” and “decreases” allows students to conceptually grasp the full impact of transactions without getting bogged down by debits and credits. It also helps students understand how real-world decisions, like taking out a loan or paying off debt, affect a company’s financial health. By using the balance equation, students can easily visualize the flow of money through a business and see how each decision a company makes influences its overall financial performance. This method not only simplifies the learning process but also helps students develop the critical thinking skills needed to analyze complex transactions in real-world scenarios.
Incorporate Hands-on Activities: Practical, hands-on activities, like accounting equation exercises, present students with various business transactions and require them to determine the financial impact by making "increase" and "decrease" decisions alongside "debit" and "credit" decisions, helping them understand the relationship between the two.
Leverage Technology: Use online learning resources that not only capture students' interest and attention but also enable instructors to quickly gather insights that highlight knowledge gaps, allowing instructors to quickly address those gaps and accelerate the learning process.
Shift Grading Focus to Higher-Order Thinking Activities: Instructors are increasingly prioritizing projects that require students to assess a company's financial performance and overall health, culminating in a presentation of their findings. For instance, students might analyze how Domino's Pizza has continued to operate despite showing negative equity on its balance sheet in recent years.
Teaching Accounting in a Changing World: Preserving Fundamentals While Embracing Technology
As the accounting landscape continues to evolve with advances in technology and automation, the way we teach foundational concepts like debits and credits must adapt. While these concepts remain integral to understanding the double-entry system, educators are moving toward a more holistic approach that emphasizes critical thinking and systems thinking. It's still crucial for students to know when to debit or credit, but an even more important question for them to prioritize is: How does the transaction impact the company's overall financial health and performance?
The Elements of Financials
By focusing on the broader implications of financial transactions and leveraging hands-on activities, educators are helping students develop critical thinking skills that will prepare them for a dynamic future in business. Balancing traditional accounting knowledge with modern tools ensures that students not only learn the mechanics of bookkeeping but also grasp the bigger financial picture.