In accounting, the mnemonic “DEALER” is used to remember how debits and credits affect different types of accounts:
D – Dividends (or Draws for sole proprietorships and partnerships)
E – Expenses
A – Assets
These accounts normally have a debit balance.
L – Liabilities
E – Equity
R – Revenues
These accounts normally have a credit balance.
Using this mnemonic, one can remember that debiting an asset account, for instance, will increase its balance, while crediting a revenue account will increase its balance.
When is DEALER commonly used?
The mnemonic “DEALER” is commonly used in accounting education to help students remember the normal balances of certain types of accounts and to understand the effects of debits and credits on these accounts.
Here’s a detailed breakdown:
Accounting Basics and Debits/Credits:
- Every financial transaction affects at least two accounts in the double-entry bookkeeping system. These effects are recorded as either debits or credits. Understanding which accounts increase with a debit versus a credit is fundamental to accounting.
Understanding the mnemonic:
- D – Dividends (or Draws): For corporations, dividends represent earnings distributions to shareholders. The owner might take a draw, a withdrawal of equity for sole proprietorships and partnerships. Both dividends and draws typically increase with debits and decrease with credits.
- E – Expenses: When a company incurs an expense, it records a debit to the respective expense account. Expenses reduce a company’s equity, and they typically have a debit balance.
- A – Assets: Assets represent resources owned or controlled by a company. When assets increase, a debit is recorded. For example, when a company buys equipment with cash, it would debit the Equipment account (an asset) and credit the Cash account (another asset). Assets typically have a debit balance.
- L – Liabilities: Liabilities represent obligations a company owes to other parties. When liabilities increase, a credit is recorded. For instance, if a company borrows money, it would debit Cash (an asset) and credit Notes Payable (a liability). Liabilities typically have a credit balance.
- E – Equity: Equity represents the residual interest in a company’s assets after deducting liabilities. Common elements in the equity section include common stock, retained earnings, and additional paid-in capital. Most equity accounts increase with credits. For instance, cash (an asset) is debited when shares are issued, and common stock (equity) is credited.
- R – Revenues: Revenues represent inflows from delivering goods, rendering services, or other activities. When a company earns revenue, it credits the revenue account. Revenues increase equity and typically have a credit balance.
- The DEALER mnemonic assists in journalizing (recording) transactions. For instance, if someone is unsure whether to debit or credit an expense account, they can refer to the mnemonic and remember that expenses normally have a debit balance and increase with a debit.
- The mnemonic is also helpful during the preparation of financial statements, specifically when adjusting journal entries is needed at the end of an accounting period.
- The mnemonic is often introduced in introductory accounting courses, especially when the concept of debits and credits is first taught. It is a handy reference for students tackling progressively complex accounting scenarios.
While “DEALER” might not be explicitly referred to in day-to-day professional accounting work, its foundational concepts are ingrained in practice, and the mnemonic is a helpful educational tool.
Sometimes DEALOR is used instead of DEALER, Where D – Dividends, E – Expenses, A – Assets, L – Liabilities, O – Owner Equity, and R – Revenues.
The mnemonic “DEALOR” is an alternative to “DEALER” to help accounting students and practitioners remember the typical effects of debits and credits on different types of accounts, especially in the context of sole proprietorships or small businesses.
Here’s a detailed breakdown:
Accounting Basics and Debits/Credits:
- The foundational concept of double-entry bookkeeping is that every financial transaction has a dual effect, impacting at least two accounts. These impacts are captured as debits or credits. The key is understanding which accounts increase with a debit and which with a credit.
Understanding the mnemonic “DEALER”:
- D – Dividends (or Draws): While dividends typically refer to distributions of profits to shareholders of corporations, “draws” are more relevant to the DEALOR mnemonic. Draws represent amounts the owner withdraws from the business for personal use in sole proprietorships. Both dividends and draws increase with debits.
- E – Expenses: Expenses represent costs incurred while conducting business. When an expense is recognized, the respective expense account is debited. Since expenses reduce the owner’s equity in the business, they have a typical debit balance.
- A – Assets: Assets are resources that a business owns or controls with the expectation that they will provide future benefits. When assets increase, you record a debit. For instance, when purchasing equipment for cash, you’d debit the Equipment account and credit the Cash account. Assets customarily have a debit balance.
- L – Liabilities: These represent amounts the business owes to creditors. When a company incurs a liability, such as taking out a loan, it will credit a liability account like Notes Payable. Liabilities normally have a credit balance.
- O – Owner’s Equity: In a sole proprietorship or small business, the equity belongs to the single owner (hence “Owner’s Equity”). This account represents the owner’s interest in the business after all liabilities are accounted for. Common transactions affecting this account include the owner’s investments and draws. Most owner’s equity accounts, like capital, have a credit balance. However, drawing accounts, representing withdrawals by the owner, typically have a debit balance since they reduce equity.
- R – Revenues: Revenues represent the amounts earned by the business, whether from selling goods, providing services, or other income-generating activities. When revenue is earned, the revenue account is credited. Revenues increase the owner’s equity and typically have a credit balance.
- The “DEALOR” mnemonic aids in the journalizing process. When you doubt whether to debit or credit a certain account, referring to the mnemonic can provide clarity.
- It’s advantageous when preparing financial statements and adjusting entries at the end of an accounting period.
- “DEALOR” is often introduced in foundational accounting courses, especially when the topic of debits and credits is introduced. It is especially pertinent to contexts where the business entity is a sole proprietorship, given the inclusion of “Owner’s Equity.”