What are debits and credits?
Debits and credits are the two sides of every entry in double-entry bookkeeping. A debit is an amount recorded on the left side of an account; a credit is recorded on the right. Debits increase assets and expenses, credits increase liabilities, equity and income, and every transaction must have equal debits and credits.
The rules come from the accounting equation: Assets = Liabilities + Equity. Income increases equity and expenses reduce it, so the expanded version is Assets + Expenses = Liabilities + Equity + Income. Accounts on the left of that equation increase with a debit; accounts on the right increase with a credit. Because every transaction posts equal debits and credits, the equation always stays in balance.
Debit and credit rules: the cheat sheet
| Account type | Examples | Debit | Credit | Normal balance |
|---|---|---|---|---|
| Asset | Cash, accounts receivable, inventory, equipment | Increase | Decrease | Debit |
| Expense | Rent, wages, cost of goods sold, software | Increase | Decrease | Debit |
| Drawings / dividends | Owner withdrawals, dividends declared | Increase | Decrease | Debit |
| Liability | Accounts payable, loans, tax payable, customer deposits | Decrease | Increase | Credit |
| Equity | Owner’s capital, retained earnings | Decrease | Increase | Credit |
| Income | Sales revenue, service income, interest received | Decrease | Increase | Credit |
Effect of a debit and a credit on each account type
Memory aid: DEAD CLIC
Debits increase Expenses, Assets and Drawings. Credits increase Liabilities, Income and Capital. Remember which side increases an account and the opposite side decreases it.
How do you know which account to debit and credit?
- 1
Which accounts changed?
Name at least two. Paying rent in cash changes Rent expense and Cash.
- 2
Did each one go up or down?
Rent expense went up. Cash went down.
- 3
Apply the cheat sheet
An expense goes up with a debit; an asset goes down with a credit. So: debit Rent expense, credit Cash. Check the two amounts are equal.
Debit and credit examples: six journal entries
Here is a new business’s first month, recorded with the three questions above.
| # | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 1 | Owner invests cash in the business | Cash (asset up) | Owner’s capital (equity up) | $10,000 |
| 2 | Buy equipment on 30-day credit | Equipment (asset up) | Accounts payable (liability up) | $3,000 |
| 3 | Invoice a customer for services | Accounts receivable (asset up) | Service revenue (income up) | $2,500 |
| 4 | Customer pays the invoice | Cash (asset up) | Accounts receivable (asset down) | $2,500 |
| 5 | Pay the month’s rent | Rent expense (expense up) | Cash (asset down) | $1,200 |
| 6 | Pay the equipment supplier | Accounts payable (liability down) | Cash (asset down) | $3,000 |
Journal entries for the first month
What does a T-account look like?
A T-account is a quick sketch of one ledger account: debits on the left, credits on the right, balance underneath. Here is Cash after the six entries above.
| Debit (left) | Credit (right) |
|---|---|
| #1 Owner investment $10,000 | #5 Rent $1,200 |
| #4 Customer payment $2,500 | #6 Supplier payment $3,000 |
| Total $12,500 | Total $4,200 |
| Balance $8,300 debit |
Cash T-account
Proving it with a trial balance
After the six entries: Cash $8,300 debit, Equipment $3,000 debit, Rent expense $1,200 debit, Owner’s capital $10,000 credit and Service revenue $2,500 credit. Accounts receivable and accounts payable are back to zero. Debits total $12,500 and credits total $12,500, so the trial balance agrees.
Why does my bank statement show a deposit as a credit?
Your bank records your balance as money it owes you, which is a liability on its books, so a deposit increases that liability with a credit. In your own books the bank balance is an asset, so the same deposit is a debit to Cash. Both are correct; you are reading the bank’s side of the relationship.
Test yourself: five transactions
- You buy $200 of office supplies with the business debit card.
- The business takes out a $15,000 bank loan, paid into its account.
- The owner withdraws $1,000 for personal use.
- A $500 electricity bill arrives; you will pay it next month.
- A customer pays a $3,000 deposit before any work starts.
| # | Debit | Credit | Why |
|---|---|---|---|
| 1 | Office supplies expense $200 | Cash $200 | Expense up, asset down |
| 2 | Cash $15,000 | Loan payable $15,000 | Asset up, liability up |
| 3 | Owner’s drawings $1,000 | Cash $1,000 | Drawings reduce equity; not a business expense |
| 4 | Utilities expense $500 | Accounts payable $500 | Cost incurred now, paid later (accrual) |
| 5 | Cash $3,000 | Customer deposits (liability) $3,000 | Not yet earned, so not revenue |
Answers
Common debit and credit mistakes
- Recording a customer payment as revenue a second time. If the sale was already invoiced, the payment credits accounts receivable.
- Posting an owner’s withdrawal as an expense. Drawings reduce equity and do not reduce taxable profit.
- Expensing equipment that should be capitalised. A laptop used for three years is usually an asset that is depreciated, subject to your capitalisation threshold.
- Recording a loan repayment entirely as an expense. Only the interest is an expense; the principal reduces the loan liability.
- Trusting a balanced trial balance completely. Posting to the wrong account, or missing an entry, still balances. Review balances that look unusual.
Do you need to know debits and credits if you use accounting software?
Software writes most entries for you. In AccountDesq, invoices, bills, payments and expenses each post a balanced journal entry automatically, and a manual journal entry cannot be saved unless debits equal credits to the cent. You still need the rules for manual adjustments such as accruals, depreciation and corrections, and for reading a general ledger or trial balance when something looks wrong.
Is a debit an increase or a decrease?
It depends on the account. A debit increases asset, expense and drawings accounts, and decreases liability, equity and income accounts.
Why must debits equal credits?
Every transaction affects at least two accounts in a way that keeps Assets = Liabilities + Equity true. Equal debits and credits enforce that balance and make errors easier to find.
Is revenue a debit or a credit?
Revenue is a credit. Income accounts have a normal credit balance because income increases owner’s equity.
Is accounts payable a debit or a credit?
Accounts payable is a liability. It increases with a credit when a supplier bill is recorded and decreases with a debit when you pay it.
Is cash a debit or a credit?
Cash is an asset with a normal debit balance. Money coming in is a debit to cash; money going out is a credit.
What is a normal balance?
The side on which an account usually carries its balance, which is the side that increases it: debit for assets and expenses, credit for liabilities, equity and income.
Ask what went up and what went down. The debit and the credit follow from that.
Resources
Was this guide helpful?