The notion of debits and credits can be related to the fundamental accounting equation. Consider both of the following observations:
Assets = Liabilities + Owners’ Equity
and
Debits = Credits
These concepts can be merged to note:
Assets (Debits) = Liabilities (Credits) + Owners’ Equity (Credits)
For example, consider the impact of an owner investment on the fundamental accounting equation:
Assets (+ or debited) = Liabilities + Owners’ Equity (+ or credited)
As you will soon learn, it is customary for accountants to record this transaction as follows:
It is a standing convention that debits are recorded to the left (in a sense, this corresponds to the idea that assets are usually on the left-hand side of a balance sheet). Conversely, credits are indented to the right.