It is best explained by common scenarios an Italian merchant in the Middle Ages experienced. The basic concept is Assets==Liability (plus Equity). Where positive Assets are entered on the left hand side (debit). And positive Liabilities are entered on the right hand side (credit). In accounting, debit and credit just means left and right.

1. Merchant takes out a loan for $5,000 and receives $5,000 in cash. • Assets (Cash) increase by $5,000 (Debit). • Liabilities (Loan Payable) increase by $5,000 (Credit). • Equity remains unchanged.

2. Merchant buys inventory for $1,000 cash. • Assets (Cash) decrease by $1,000 (Credit). • Assets (Inventory) increase by $1,000 (Debit). • Total assets remain unchanged, and liabilities and equity are unaffected.

3. Merchant sells all inventory for $1,500 cash. • Assets (Cash) increase by $1,500 (Debit). • Assets (Inventory) decrease by $1,000 (Credit) (recording cost of goods sold). • Equity (Retained Earnings) increases by $500 (Credit), representing the profit ($1,500 sales - $1,000 cost).

4. Customer1 deposits $500 in cash for future delivery of goods. • Assets (Cash) increase by $500 (Debit). • Liabilities (Unearned Revenue) increase by $500 (Credit). • Equity remains unchanged.

5. Customer1 transfers half of the future delivery of goods to Customer2. • No changes to assets, liabilities, or equity occur at this point. The merchant’s obligation to deliver goods (reflected as Unearned Revenue) is still $500 but now split between two customers (Customer1 and Customer2). Internal tracking of this obligation may be updated, but the total financial liability remains the same.