Debits and Credits 101: Definitions & Example

In accounting, there’s one thing you can’t ignore: how debits and credits work. To
keep accurate books, learn and understand the difference between credit vs. debit.

Debits and credits keep your books balanced and organized. Read on to learn more
about debits and credits in accounting.

What are debits and credits in accounting?

Part of your role as a business is recording transactions in your small

business accounting books. And when you record said transactions, credits and
debits come into play.

Debits and credits are equal but opposite entries in your books. If a debit increases
an account, you must decrease the opposite account with a credit.

Record accounting debits and credits for each business transaction. When you
record debits and credits, make two or more entries for every transaction. This is
considered double-entry bookkeeping.

So, what is the difference between debit and credit in accounting? Get the full
scoop below.

Debit vs. credit: Debit

A debit (DR) is an entry made on the left side of an account. It either increases an
asset or expense account or decreases equity, liability, or revenue accounts (you’ll
learn more about these accounts later).

For example, you debit the purchase of a new computer by entering it on the left
side of your asset account.

Debit vs. credit: Credit

On the other hand, a credit (CR) is an entry made on the right side of an account. It
either increases equity, liability, or revenue accounts or decreases an asset or
expense account (aka the opposite of a debit).

Using the same example from above, record the corresponding credit for the
purchase of a new computer by crediting your expense account.
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Credit and debit accounts

When recording transactions in your books, you use different accounts depending
on the type of transaction. The main accounts in accounting include:

 Assets: Physical or non-physical types of property that add value to your business
(e.g., land, equipment, and cash).
 Expenses: Costs that occur during business operations (e.g., wages and supplies).
 Liabilities: Amounts your business owes (e.g., accounts payable).
 Equity: Your assets minus your liabilities.
 Revenue/Income: Money your business earns.
Accounting credits and debits affect each account differently. Check out our chart
below to see how each account is affected:
Debit and credit journal entry

So, what does a debit and credit journal entry look like? Here’s a basic example of
how a debit and credit journal entry would look:

Date Account Debit Credit

X/XX/XXXX Account X

Opposite Account X

Again, equal but opposite means if you increase one account, you need to decrease
the other account and vice versa.

Debits and credits example 1

Let’s say you decide to purchase new equipment for your company for $15,000.

The equipment is an asset, so you must debit $15,000 to your Fixed Asset account
to show an increase. Purchasing the equipment also means you increase your
liabilities. To record the increase in your books, credit your Accounts Payable
account $15,000.

Record the new equipment purchase of $15,000 in your accounts like this:

Date Account Notes Debit Credit

XX/XX/XXXX Fixed Assets Purchase of equipment 15,000

Accounts Payable 15,000

Debits and credits example 2

Say you purchase $1,000 in inventory from a vendor with cash. To record the
transaction, debit your Inventory account and credit your Cash account.

Date Account Notes Debit Credit

XX/XX/XXXX Inventory Purchase inventory 1,000

Cash 1,000

Because they are both asset accounts, your Inventory account increases with the
debit while your Cash account decreases with a credit.

Debits and credits example 3

Onto our last of the debits and credits examples: Sales on credit. You make a $500
sale to a customer who pays with credit. Increase your Revenue account through a
credit. And, increase your Accounts Receivable account with a debit.

Date Account Notes Debit Credit

XX/XX/XXXX Accounts Receivable Sale to customer on credit 500

Revenue 500
 Credits vs. debits: Quick recap

Have a firm grasp of how debits and credits work to keep your books error-free.
Accurate bookkeeping can give you a better understanding of your business’s
financial health. Not to mention, you use debits and credits to prepare
critical financial statements and other documents that you may need to share with
your bank, accountant, the IRS, or an auditor.

Check out a quick recap of the key points regarding debits vs. credits in
accounting.

Debits

 Debits increase as credits decrease.

 Record on the left side of an account.
 Debits increase asset and expense accounts.
 Debits decrease liability, equity, and revenue accounts.
Credits

 Credits increase as debits decrease.

 Record on the right side of an account.
 Credits increase liability, equity, and revenue accounts.
 Credits decrease asset and expense accounts.
This article was updated from its original publication date of December 3, 2015
 Debits and Credits in Accounting: With Journal Entry Examples
In accounting, debits and credits are the fundamental building blocks for recording
financial transactions. They may appear challenging, but understanding debits and
credits is critical for keeping correct financial records. This guide will break down
what is debit and credit, explain how they apply to different account types, and
provide examples to help you comprehend them.

1. Understanding Debits and Credits

2. Debits and Credits in Different Account Types
3. Relation to General Ledger, Trial Balance, and Financial Statements
4. Sample Entries with Debits and Credits for Common Scenarios
5. Automate Your Debit and Credit Accounting with Vencru

Understanding Debits and Credits

Imagine your accounting system as a giant T-shaped chart. Each account in your
system (like cash, inventory, or expenses) has its T-account. The left side of the T
represents the debit side, and the right side represents the credit side.

Transactions are recorded by making entries in these T-accounts. Debits and

credits affect accounts differently depending on their type:

 Debit (DR): A debit typically increases asset and expense accounts and
decreases liability, equity, and revenue accounts. You can think of “debit” as
“Debit to Get” for assets and expenses.
 Credit (CR): A credit typically increases liability, equity, and revenue
accounts and decreases asset and expense accounts. Think of “credit” as
“Credit to Give” for liabilities, equity, and revenue.
Remember: These are general rules, and there may be exceptions depending on
specific accounts.

Debits and Credits in Different Account Types

Let’s delve into debits and credits for various account types with illustrative
examples:

Assets
Assets are resources owned by the business, that hold the promise of future
economic benefits. From a crisp $20 bill in the cash register to the delivery truck
used for making sales, assets are fundamental to financial health and operational
success. Let’s delve deeper into some key asset categories:

 Cash: represents the tangible currency and coins held by the business
 Accounts Receivable: tracks the money customers owe for goods or
services purchased on credit.
 Inventory: represents the stock of goods a business holds for sale – from
raw materials to finished products.
 Equipment: Machinery, vehicles, furniture – these tangible assets used in
daily operations.
 Prepaid Expenses: Think of prepaid rent or insurance – these represent
expenses paid for in advance.
Debits generally increase the value of assets (e.g., purchasing equipment, receiving
cash), while Credits decrease the value of assets (e.g., selling equipment, using
supplies)

For example, if a business purchases inventory for $1,000 cash:

 A debit of $1,000 is recorded in the Inventory account, increasing the asset.

 Simultaneously, a credit of $1,000 is logged in the Cash account, reflecting
the decrease in assets.

Liabilities
Liabilities are financial obligations or debts owed to external entities like suppliers,
banks, or employees. Here’s a breakdown of some key sub-accounts within
liabilities:

 Accounts Payable: tracks the amounts owed to suppliers for goods or

services purchased on credit.
 Loans Payable: reflects the principal amounts borrowed through loans.
 Accrued Expenses: Not all expenses are settled immediately. Accrued
expenses capture those incurred but not yet paid, such as salaries owed to
employees or utilities used.
 Notes Payable: When a business issues formal promissory notes to
creditors, the amounts owed are tracked in this sub-account.

Debits generally represent actions that decrease liabilities, such as paying off a
loan. On the other hand, credits signify activities that increase liabilities, like
borrowing money. For example, borrowing $5,000 from the bank would involve
debiting cash (the asset increases) and crediting accounts payable (the liability
increases).

Equity
Equity represents the ownership claim on the business’s assets, essentially what’s
left after subtracting all liabilities (debts) from the total assets. It includes the
following sub-accounts:`

 Common Stock: reflects the initial investment made by shareholders in

exchange for ownership rights in the company.
 Retained Earnings: accumulates the net profits or losses earned by the
business after distributing dividends to shareholders.
 Owner’s Equity: tracks the financial stake of the owner(s) in the business,
representing their direct investment.
  Debits generally decrease equity, such as when an owner withdraws cash for
personal use, while credits represent activities that increase equity, like
retaining profits or receiving a new investment. For instance, if you invest
$10,000 cash into your business:

 Debit Cash: $10,000 (Asset decreases)

 Credit Common Stock: $10,000 (Equity increases)

Revenue
Revenue represents the income generated from its core activities. It encompasses
various streams, with notable sub-accounts being:

 Sales Revenue: captures the income earned from selling goods or services
to customers.
 Service Revenue: reflects the income earned from providing and delivering
services to clients or customers.
 Interest Income: tracks the interest earned on investments or loans made by
the business.

Debits are typically used to decrease revenue accounts, although this is rare and
often related to returns or customer allowances. Conversely, a revenue account is
increased by credits indicating activities that boost revenue, such as sales of
products or services.

For example, if $2,000 worth of goods are sold to a client

 To record a sale on account the company should debit the Accounts

Receivable account of $2000, increasing the asset.
 Simultaneously, a credit of $2,000 is logged in the Sales Revenue account,
reflecting the rise in revenue.

Expenses
Expenses are the costs incurred by the business while generating revenue. They
include a variety of categories necessary for business operations:

 Rent Expense: captures the costs of renting or leasing property, such as

office space or equipment, used for business activities.
 Utility Expense: records the expenditures related to essential services like
electricity, water, and gas necessary for business operations.
 Salaries Expense: accounts for the remuneration disbursed to employees for
their contributions to the business.
Debits are primarily used to increase expense accounts, reflecting the cost being
used or paid. For example, if you pay $500 cash for your monthly rent, you’d
debit rent expense (the expense increases) by $500 and credit cash (the asset
decreases) by $500.

Credits are rarely used for expenses, but they might come into play for exceptional
circumstances, such as reversing an expense that was recorded incorrectly.

Journal Entry
Journal entry is the formal recording of financial transactions in the accounting
system. Each journal entry consists of at least one debit and one credit, with the
total debits equaling the total credits. Journal entries are used to update the general
ledger accounts and form the foundation for financial statements.
Relation to General Ledger, Trial Balance, and Financial Statements:

 General Ledger: contains all the individual accounts businesses use,

showing the transactions and balances for each account. Journal entries are
posted to the appropriate accounts in the general ledger.
 Trial Balance: is a list of all general ledger account balances at a specific
time. It ensures that the total debits equal the total credits.
 Financial Statements: summarize a business’s financial performance and
position. They are created using information from the general ledger and
trial balance. Common financial statements include:
o Income Statement (Summarizes revenues and expenses for a period)
o Balance Sheet (Shows assets, liabilities, and equity at a specific point
in time)
o Cash Flow Statement (Details cash inflows and outflows from
operating, investing, and financing activities)
o How They Relate:

 Journal entries capture individual transactions.

 The general ledger accumulates these entries in each account.
 The trial balance verifies the accuracy of these entries by ensuring the debits
and credits balance.
 Financial statements use summarized data from the general ledger to present
the business’s overall financial health.
Here’s an example to illustrate how debits and credits, journal entries, and reports
connect:

 Scenario: A company sells products for $1,000 cash and incurs $200 in rent
expenses (paid in cash).
 Journal Entry:
o Debit Cash: $1,000 (Asset increase – cash received)
o Credit Sales Revenue: $1,000 (Revenue increase – product sale)
o Debit Rent Expense: $200 (Expense increase – rent paid)
o Credit Cash: $200 (Asset decrease – cash paid for rent)
 Impact on Reports:
o The sales transaction increases cash (asset) and sales revenue.
o The rent expense increases expenses and decreases cash.
o These transactions are posted to the general ledger and eventually
reflected in the income statement (sales revenue and rent expense) and
balance sheet (cash, sales revenue, and rent expense).

Sample Entries with Debits and Credits for Common Scenarios:

Accounts Payable
Example: Purchased $1,000 worth of inventory on credit.

 Journal Entry:
o Debit: Inventory (Asset) – $1,000
o Credit: Accounts Payable – $1,000

Accounts Receivable
Example: Sold goods totaling $2,000 to a client on credit.

 Journal Entry:
o Debit: Accounts Receivable – $2,000
o Credit: Sales Revenue – $2,000

Advertising Expense
This includes costs incurred for promoting products or services to potential
customers. For example, paid $300 for an online advertising campaign.

 Journal Entry:
o Debit: Advertising Expense – $300
o Credit: Cash – $300
Asset Source Transaction
This can involve various scenarios, but generally:

 Debit: Asset Account (e.g., Inventory, Equipment) – This increases the asset
acquired.
 Credit: Cash (if purchased with cash) or Accounts Payable (if purchased on
credit) – This decreases the asset (cash) or increases the liability (accounts
payable).

Common Stock
Is Common Stock a debit or credit? Common stock is recorded as a credit in the
accounting records. When shareholders invest in the company by purchasing
common stock, it increases the business equity, which is recorded as a credit to the
common stock account. For example, if a company issues common stock for
$5,000 cash, the journal entry would be:

 Debit: Cash – $5,000

 Credit: Common Stock – $5,000

Cash Received on Account

This refers to cash received from customers for previous sales made on credit. For
example, received $500 cash from a customer who purchased goods on credit.

 Journal Entry:
o Debit: Cash – $500
o Credit: Accounts Receivable – $500

Cost of Goods Sold

Example: Sold inventory for $3,000 with a cost of goods sold of $1,500.

 Journal Entry:
o Debit: Cost of Goods Sold – $1,500
o Credit: Inventory – $1,500

Depreciation Expense
This accounts for the gradual decrease in the value of a non-current asset over
time. For example, a business recorded monthly equipment depreciation amounting
to $400.
Journal Entry:

o Debit: Depreciation Expense – $400

o Credit: Accumulated Depreciation – $400

Related Read: What is depreciation in accounting and how is it calculated?

Gain
Gain accounts record profits earned from transactions other than normal business
operations. For example, a business sold an investment property for $20,000 more
than its book value.

 Journal Entry:
o Debit: Cash – $20,000
o Credit: Gain – $20,00

Insurance Expense
Example: Paid $700 for monthly insurance premiums

 Journal Entry:
o Debit: Insurance Expense – $700
o Credit: Cash – $700

Interest Income
Example: Received $300 in interest from a bank deposit.

 Journal Entry:
o Debit: Cash – $300
o Credit: Interest Income – $300

Land
Example: Purchased land for $50,000 cash.

 Journal Entry:
o Debit: Land – $50,000
o Credit: Cash – $50,000

Net Income
This represents the total profit earned by the business after deducting all expenses
from total revenue. For example, you generated $10,000 in revenue and incurred
$7,000 in expenses.
  Journal Entry:
o Debit: Revenue Accounts – $10,000
o Credit: Expense Accounts – $7,000
o Credit: Net Income – $3,000

Related Read: How To Calculate Net Income: A Complete Guide

Owner’s Drawings
Drawings represent withdrawals made by the owner from the business for personal
use. For example, the business owner withdrew $1,000 cash for personal expenses.

 Journal Entry:
o Debit: Owner’s Drawings – $1,000
o Credit: Cash – $1,000

Owner’s Equity
Example: Invested $10,000 cash into the business.

 Journal Entry:
o Debit: Cash – $10,000
o Credit: Owner’s Equity – $10,000

Prepaid Insurance
This represents insurance premiums paid in advance, which will be expensed over
time. Is prepaid insurance an asset? Yes, prepaid insurance is indeed classified as
an asset. This is because the insurance coverage provides future economic benefits
to the business, similar to other assets. For example, paid $1,200 for annual
insurance coverage.

 Journal Entry:
o Debit: Prepaid Insurance – $1,200
o Credit: Cash – $1,200

Retained Earnings
This represents the cumulative profits earned by the business that has not been
distributed to shareholders as dividends. For example, the net income for the year
is $20,000.

 Journal Entry:
o Debit: Net Income – $20,000
o Credit: Retained Earnings – $20,000
Salaries Expense
Example: Paid employees $4,000 in salaries.

 Journal Entry:
o Debit: Salaries Expense – $4,000
o Credit: Cash – $4,000

Supplies
This represents consumable items used in the business’s day-to-day operations,
such as office or cleaning supplies. For example, purchased office supplies for
$300 cash.

 Journal Entry:
o Debit: Supplies (Asset) – $300
o Credit: Cash – $300

Wages Payable
This represents the wages or salaries owed to employees that have been earned but
not yet paid. For example, a business accrued $1,000 in wages for the current pay
period.

 Journal Entry:
o Debit: Wages Expense – $1,000
o Credit: Wages Payable – $1,000

In conclusion, understanding debits and credits is fundamental to maintaining

accurate financial records and ensuring a business’s financial health. By mastering
the concepts outlined in this guide, businesses can effectively record transactions,
analyze financial performance, and make informed decisions.

However, managing debits and credits manually can be time-consuming and prone
to errors. That’s where Vencru comes in. With Vencru’s intuitive accounting
software, businesses can streamline their debit and credit accounting processes,
automate journal entries, and easily generate comprehensive financial reports.

Whether you’re recording expenses, tracking revenue, or managing assets and

liabilities, Vencru simplifies the accounting process, allowing businesses to focus
on what they do best—growing and succeeding. So why struggle with manual
accounting when you can use Vencru to automate your debit and credit accounting
and take your business to the next level? Try Vencru today and experience the
difference!

Your Simple Guide to Debits and Credits + Examples

Most people know that debit cards let you spend out of a checking account, while
credit cards let you borrow money to pay back every month.
In accounting, “debits” and “credits” have slightly different meanings — and this
confuses plenty of people who aren’t too familiar with accounting jargon.
Yet, debits and credits are foundational to doing your accounting in the first place.
It helps immensely to understand them, even if your software or bookkeeper
handles your bookkeeping.
Below is a simple guide to debits and credits. You’ll learn what they are (and the
differences between them) and how they affect your firm’s financial accounts.
What Are Debits and Credits?
Debits and credits are simply types of accounting entries used to record changes in
financial accounts that result from business transactions.
In general, a debit represents money coming into one of your financial accounts.
Credits, on the other hand, show money leaving an account.
What do we mean by “accounts”?
Well, the double-entry accounting system used by nearly every business in
existence breaks your firm down into individual accounts. Think of these like
buckets containing defined amounts of money.
For example, your accounts receivable might be one bucket (an asset). Creating a
new invoice would increase your accounts receivable, whereas receiving payment
on an invoice would reduce it.
Any transaction your business makes affects at least two buckets. One will go up,
and the other will go down.
Thus, every financial transaction consists of a debit portion and a credit portion to
balance your books. Multiple accounts may be debited and/or credited in the
same journal entry, too.
In an accounting ledger, you record debits on the left and credits on the right.
A Quick Table to Help You Out
Here’s a quick table showing how debits and credits affect each type of account.
We’ll cover these transactions in more detail in the next section.

DEBITS CREDITS
Transaction Location Left Right
Assets ↑ ↓
Liabilities ↓ ↑
Equity ↓ ↑
Revenue ↓ ↑
Expenses ↑ ↓

It also helps to know the accounting equation: Assets = Liabilities + Owner’s

Equity. You’ll see this in action below.
How Debits and Credits Affect Each Type of Account
Assets
Debits increase assets, whereas credits decrease them.
Let’s look at a quick example.
Imagine you purchase $1,000 of inventory from a supplier with cash. Cash, of
course, is an asset — and so is inventory.
Cash is flowing out of your hands in exchange for receipt of this inventory.
You’d record the transaction as follows:

ACCOUNT DEBIT CREDIT

Inventory $1,000

Cash $1,000
We received inventory, so we debit the inventory account, increasing its value.
Meanwhile, we paid out cash, so we’d credit the cash account. The accounting
equation stays in balance because the increase and decrease in assets cancel each
other out.
Liabilities
Liabilities work in the exact opposite fashion as assets. Debits decrease them,
while credits increase them.
Let’s modify our previous example. Say you purchased $1,000 of inventory on
credit. You’d first record this entry:

ACCOUNT DEBIT CREDIT

Inventory $1,000

Accounts Payable $1,000

To keep the accounting equation in balance, you have to increase a liability.

Accounts payable is a liability that represents money you owe to suppliers and
vendors. You’re increasing your accounts payable by buying on credit since you
now owe money.
Now, say you pay your $1,000 invoice 15 days later. You’d record the following:

ACCOUNT DEBIT CREDIT

Accounts Payable $1,000

Cash $1,000

Once you pay your $1,000 invoice, you no longer owe money. Thus, you debit
accounts payable to “clear it out”. Meanwhile, you’re sending money to your
supplier, so you credit cash to reduce the cash account.
You’ve reduced both a liability and an asset, keeping the accounting equation
balanced.

Equity
Equity works like liabilities — debits make equity go down, and credits make it go
up.
Here’s a simple example:
Say you persuade a friend to invest $2,000 into your burgeoning new business.
You’d record the entry as follows:

ACCOUNT DEBIT CREDIT

Cash $2,000

Equity (friend) $2,000

Your business receives cash from your friend. Recall that cash is an asset, and
debits increase assets, so you debit cash.
However, you must also record the equity you issued to your friend to balance the
accounting equation. Thus, you credit that equity account (which increases equity)
to balance out the transaction.

Revenue
Debits increase assets, so it must increase revenue, right?
Nope — it’s the opposite. Debits reduce revenue, while credits increase it. This is
because revenues increase equity. In a corporation, revenues are closed out and
transferred to the retained earnings account at the end of an accounting period.
This makes more sense if we look at an example.
Imagine you sell $1,000 worth of services on credit to a customer. Here’s what the
incomplete journal entry looks like:

ACCOUNT DEBIT CREDIT

Accounts receivable $1,000

??? $1,000

Selling something on credit increases your accounts receivable — an asset account

— since someone now owes you money.
But what about that second line? You must credit something to balance the
transaction. That something is revenue.

ACCOUNT DEBIT CREDIT

 Accounts receivable $1,000

Services Revenue $1,000

We know that if assets increase, either liabilities or equity must as well. Earning
revenue increases owner’s equity (by increasing profits), so we credit revenue here
to raise it.
Expenses
Finally, expenses function opposite of revenue because they reduce owner’s
equity. Debits increase expenses, while credits decrease them.
Here’s an example:
Perhaps you spend $1,000 on advertising. Here’s the incomplete journal entry:

ACCOUNT DEBIT CREDIT

??? $1,000

Cash $1,000

Cash flows out of your bank account, so you credit cash $1,000, reducing your
assets. You must balance the accounting equation by decreasing either liabilities or
equity in some way.
Expenses decrease owner’s equity because they reduce profits, so you’d debit
expenses to balance the entry out:

ACCOUNT DEBIT CREDIT

Advertising Expense $1,000

Cash $1,000
The Bottom Line
Accounting seems like a completely different language. In fact, it’s often called
“the language of business.” It’s understandable if the terms are confusing.
Hopefully, though, this guide helped clear the air about the most fundamental parts
of accounting, debits and credits. By the way, accounting software like ZarMoney
handles this stuff for you, so you don’t have to figure

Debits and Credits

 Debits and credits are accounting entries that record business transactions in two or
more accounts using the double-entry accounting system.

A very common misconception with debits and credits is thinking that they are
“good” or “bad”. There is no good or bad when it comes to debits and credits. I’ve
seen people say “oh, debits are good because they increase the assets accounts” but
if you do that, you’re going to have a problem with expense accounts, which also
have debit balances.

Put very simply, debits (dr.) always go in the left column of a t-account and
credits (cr.) always go in the right column. That’s it. No exceptions.
 A debit is an entry on the left-hand side that increases an asset or expense account,
or decreases a liability or equity account.
 A credit is an entry on the right-hand side that increases a liability or equity
accounts, or decreases an asset or expense account.
Debits and credits are only used in the double-entry accounting system. For a
single entry system, a single notation is made for the transaction and this is usually
entered in a check box or a cash journal. It’s also worth knowing that a single entry
system is only designed to produce one financial statement: the income statement.
Debit and Credit Accounts
We know that debits are amounts entered on the left-hand side of an account and
that credits are entered on the right-hand side. But what accounts do they affect,
and how?
A common way that accountants often use to remember whether to credit or debit
an account is using DC ADE LER.
That probably doesn’t make much sense on its own so let’s look at it in the context
of a T-account:
Debit
 Assets
 Draw
 Expenses

Credit
 Liabilities
 Equity
 Revenue

So the DC stands for the headers, Debit and Credit. ADE in the left column refers
to assets, draw (meaning money withdrawn from the business), and expenses. LER
is liabilities, equity, and revenue.
 Debit accounts are on the left, and credit accounts are on the right. The movements
between these accounts look like this:

 Debit will increase an asset

 Credit will increase a liability
 Debit will increase a draw
 Credit will increase an equity
 Debit will increase an expense
 Credit will increase a revenue

Remember the accounting equation is assets = liabilities + equity. Those accounts

are used to form the balance sheet. The expense and revenue accounts are used to
form the income statement.
Debit and Credit Usage

As we’ve already covered, whenever you create a transaction, at least two accounts
will be impacted using the double-entry method. A debit entry is recorded in one
account, and a credit entry is recorded in another.

It’s worth noting that there is no upper limit to the number of accounts involved in
a transaction. As long as transaction balances, you can post entries across a number
of accounts.

Another confusion with debit and credit accounts is something we covered briefly
with DC ADE LER and it’s how debit and credits affect different accounts.

If you debit a cash account, this simply means the amount of cash increases. But if
you debit accounts payable account, it means your total amount of liability
owing decreases.
Debits and credits have different impacts depending on the account types, and it all
goes back to the basic accounting equation.

Here are the rules for debiting and crediting specific accounts:

 Asset accounts. A debit increases the balance and a credit decreases the balance.
 Liability accounts. A debit decreases the balance and a credit increases the
balance.
 Equity accounts. A debit decreases the balance and a credit increases the balance.
 Revenue accounts. A debit decreases the balance and a credit increases the
balance.
 Expense accounts. A debit increases the balance and a credit decreases the
balance.
 Gain accounts. A debit decreases the balance and a credit increases the balance.
 Loss accounts. A debit increases the balance and a credit decreases the balance.
Debit and Credit Rules

The basic rules of debits and credits are:

 All accounts that usually have a debit balance will increase when a debit (left-hand
side) is added, and decrease when a credit (right-hand side) is added. Debit
accounts include assets, expenses and dividends (draw).
 All accounts that usually have a credit balance will increase when a credit (right-
hand side) is added, and decrease when a debit (left-hand side) is added. Credit
accounts include liabilities, equity and revenue.
 The debit side and credit side of a transaction must be equal. If not, the transaction
is unbalanced and will result in an error in your accounting software that needs to
be fixed.
Common Debit and Credit Transactions

As you spend more time working with the double-entry bookkeeping system,
you’ll notice that there are some common business transactions that will crop up
that your debit and credit regularly.

A few examples of these include:

 Sale for cash. Debit cash account | Credit revenue account

 Sale on credit. Debit accounts receivable account | Credit revenue account
 Cash payment for accounts receivable. Debit cash account | Credit accounts
receivable account
 Purchase supplies with cash. Debit supplies expense account | Credit cash
account
 Purchase supplies on credit. Debit supplies expense account | Credit accounts
payable account
 Purchase inventory for cash. Debit inventory account | Credit cash account
 Purchase inventory on credit. Debit inventory account | Credit accounts payable
account
 Pay employee salaries. Debit wages expense and payroll tax accounts | Credit
cash account
 Take out a loan. Debit cash account | Credit loans payable account
 Repay a loan. Debit loans payable account | Credit cash account
Example of Debits and Credits

Let’s start a business together with $20,000 in cash.

To start, we need to purchase some materials to produce our product, which costs
$500. Next, we need to sell those products, which we sell for a total of $800.

Finally, we decide that in order to grow, we need additional capital and we borrow
$5,000 from the bank.

Here’s how the debits and credits might look for those transactions:

As you can see, there are two entries for each transaction and the total of the debits
and credits for any transaction must always equal each other.

Most modern accounting software won’t even let you submit the entry if the debits
and credits don’t balance.

FAQs

1. What are debits and credits?

Debits and credits are terms used in double-entry bookkeeping to track the changes
in each account. Whenever a transaction occurs, there will be two entries made,
one on the debit side and one on the credit side. The total of the debits must always
equal the total of the credits.
2. What are examples of debits and credits?

Some common examples of debits and credits include sales, cash payments,
purchases, bank loans, and repayments.
3. What is the rule for debits and credits?

The basic rule for debits and credits is that all accounts that usually have a debit
balance will increase when a debit is added and decrease when a credit is added.

Credit accounts include liabilities, equity, and revenue. All accounts that usually
have a credit balance will increase when credit is added and decrease when a debit
is added.
4. Is a payment a debit or credit?

Payment is a credit because it increases the asset (cash) and decreases the liability
(accounts payable).

5. Why do debits and credits have to equal?

The debits and credits must be equal because every transaction has two entries, one
on each side. The total of the debits must always equal the total of the credits for
that transaction.

If the debits and credits don’t balance, it means that there is an error in the
bookkeeping and the entry won’t be accepted. Therefore, most modern accounting
software will only let you submit the entry if the debits and credits do balance