In bookkeeping, debits and credits are labels that denote the flow of value across accounts. A debit is the opposite of a credit, which means that for every debit transaction, there is an equal and opposite credit transaction. This labeling system keeps bookkeeping entries balanced, ensuring accuracy and preventing fraud.
Highlights
- Debits and credits represent two sides of a transaction, with debits representing value flowing into business operations and credits representing value flowing to a source of funds
- For every debit transaction, there must be an equal and opposite credit transaction, and vice versa
- You can refer to the modified accounting equation (Assets + Expenses + Dividends = Liabilities + Equity + Revenue) or the mnemonic DEALER (Dividends, Expenses, Assets, Liabilities, Equity, and Revenue) to remember which types of accounts have naturally-occurring debit or credit balances.
Debit and Credit Bookkeeping Summary
| Debits | Credits |
| Denotes value flowing in | Denotes value flowing out |
| Recorded on the left side of an accounting journal | Recorded on the right side of an accounting journal |
| Increases asset and expense account balances | Increases liability, equity, and revenue account balances |
| Decreases liability, equity, and revenue account balances | Decreases asset and expense account balances |
Double-entry bookkeeping uses two sides to represent financial transactions: a debit side and a credit side. To ensure your books are balanced, the system requires you to record an equal and opposite debit entry for every credit entry and vice versa.
What Is a Debit?
Debits represent a specific amount of economic benefit flowing from an outside source and into the business. You record debits on the left side of your ledger.
Debits increase assets and expenses while decreasing liabilities, equity, and revenue.
To understand the thought underlying the principle, think of debits as transactions that place value into resources that will yield useful material benefits. For example:
- A debit to assets will increase your useable resources, such as cash, property, inventory, or equipment.
- A debit to expenses places money into operations that bring value to your business, such as rent, salaries, and equipment.
- A debit to liabilities pays off the loan that had previously yielded the material benefit of cash (or other assets) to your business.
What Is a Credit?
In turn, credits represent a specific amount of economic benefit flowing from your business and into an outside source. You record credits on the right side of your ledger.
Credits increase the balances of liability, equity, and revenue accounts while decreasing asset and expense balances. To put it simply, think of credits as sources of useable funds.
- A credit to liabilities pulls useable funds from a debtor.
- A credit to equity pulls useable funds from an investor.
- A credit to revenue pulls useable funds from revenue entering the business.
- A credit to assets pays off funds you had pulled from a debtor, investor, entering revenue, or business assets.
How Debits and Credits Affect Bookkeeping Accounts
| Account Type | Debit Impact | Credit Impact |
| Assets | Increases | Decreases |
| Expenses | Increases | Decreases |
| Liabilities | Decreases | Increases |
| Equity | Decreases | Increases |
| Revenue | Decreases | Increases |
For easy reference, we’ve provided a table showing how debits and credits affect different types of accounts. Below, we examine these relationships more closely.
Assets
Asset accounts record anything the business currently owns that can provide current or future value. Cash on hand, cash in the bank, accounts receivable, inventory, equipment, and property are all examples of assets.
- Debits increase asset account balances because they represent money flowing into useable business resources.
- Credits decrease asset accounts because they represent money moving from useable resources to a source.
Expenses
Expense accounts record the costs of operating the business. Examples include rent, utilities, employee salaries, travel, marketing, and maintenance.
- Expense account balances increase with debits because they represent money placed into business-supporting activities.
- Expense accounts are not often credited, but when they occur, the transaction decreases your expense account balance. The decrease occurs because the transaction represents a reduction in money being spent on business activities. For example, if you had mistakenly paid an extra $500 to a service contractor, and they refund you, the refund would be credited to your expense account.
Liabilities
Liabilities record everything that the business owes. This includes credit card debt, loans, taxes, and accounts payable.
- Liability account balances increase with credits because the transaction represents an addition to an external pool of money you can draw useable funds from.
- Liability account balances decrease with debits because the transaction represents a reduction in available funds from an external source. Debits pay off your debt, making its balance smaller.
Equity
Equity records capital that shareholders have invested into the business. Types of equity include owner’s equity, common stock, preferred stock, and retained earnings.
- Like with liability account balances, equity account balances increase with credits because the transaction represents an addition to an external pool of money you can draw useable funds from.
- Equity account balances decrease with debit because the transaction represents a reduction in shareholder investment.
Revenue
Revenue accounts record value produced by business activities. Revenue can come from your main business activities, such as sales and services, or side activities, such as investment profits, interest earned on deposit accounts, and rent.
It can be confusing to differentiate between revenue and cash. Try to think of revenue as the abstract representation of business earnings that have not yet been paid out.
- Credits increase revenue because they represent growth in your source of useable funds.
- Debits decrease revenue because they reflect a decrease in the business’ income, reducing its source of useable funds.
The Accounting Equation
Another way to understand the reason behind debit and credit rules is to dissect the accounting equation, which states that assets are equal to the sum of liabilities and equity. It is represented mathematically by the equation:
| Assets = Liabilities + Equity |
When expanded, you get the equation below:
| Assets = Liabilities + Equity – Dividends + Revenue – Expenses |
You can move the negatives to the left side of the equation and get the result below.
| Assets + Expenses + Dividends = Liabilities + Equity + Revenue |
* Note that dividends aren’t typically included in the five primary account types and are instead recorded as liabilities or reductions in equity.
All variables on the left side have a naturally occurring debit balance and thus increase with debits. Meanwhile, all variables on the right side have a naturally occurring credit balance and thus increase with credits. Only when both sides are equal and opposite will the equation balance.
The DEALER Mnemonic
You can also use the mnemonic DEALER to remember which accounts have naturally occurring debit vs credit balances.
- Dividends
- Expenses
- Assets
- Liabilities
- Equity
- Revenue
The first three letters represent accounts with naturally occurring credit balances, while the last three letters represent accounts with naturally occurring credit balances.
Debit and Credit Bookkeeping Examples
We’ve provided a few examples to help you understand how debits and credits are used in bookkeeping. In this scenario, you are a visual artist who sells prints and art commissions.
Purchasing equipment
You want to invest in a $699 printer for your art prints. You decide to pay out of pocket through a wire transfer, but the bank charges a $5 transfer fee.
First, you’ll record an increase in assets worth $699 on the debit column. In the same column, you also incur an increase in expenses amounting to $5. This earns you a cash loss of $704, which you record on the credit column.
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Equipment (Assets) | $699 | |
| XX-XX-XXXX | Transfer Fee (Expenses) | $5 | |
| XX-XX-XXXX | Cash (Assets) | $704 |
Paying contractors
Say you outsource a web developer to redesign your company’s website. She charges a flat fee of $1,000 for her services.
The service is an expense, so you record $1,000 on the debit side. Meanwhile, you would record an equivalent $1,000 in accounts payable on the credit side.
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Web Design (Expense) | $1,000 | |
| XX-XX-XXXX | Accounts Payable (Liability) | $1,000 |
Paying off a loan
You decide to pay $1,000 off your loan balance. The transaction would credit $1,000 from your cash account and debit $1,000 to your liability account.
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Cash (Asset) | $1,000 | |
| XX-XX-XXXX | Loan (Liability) | $1,000 |
Selling a product
A customer buys three different art prints. Creating each costs $50, $100, and $200, respectively, but you sell everything under a 50% markup. This earns you a revenue of
$75 plus $150 plus $300, or $525, which the customer pays in cash.
First, you would record a $525 debit to cash and a $525 credit to revenue. Then you note the $50, 100, and $200 increase in expenses (cost of goods sold) under the debit column and record a respective decrease in assets (inventory).
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Cash (Asset) | $525 | |
| XX-XX-XXXX | Sales Revenue (Revenue) | $525 | |
| XX-XX-XXXX | Cost of Goods Sold (Expense) | $50 | |
| XX-XX-XXXX | Cost of Goods Sold (Expense) | $100 | |
| XX-XX-XXXX | Cost of Goods Sold (Expense) | $200 | |
| XX-XX-XXXX | Inventory (Assets) | $350 |
Selling a service
A customer commissions you to create an illustration for $200. You would add $200 as an accounts receivable asset under the debit column and a $200 revenue under the opposite column.
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Accounts Receivable (Asset) | $200 | |
| XX-XX-XXXX | Sales Revenue (Revenue) | $200 |
Refunding a customer
A customer accidentally overpaid $50 for a commission. You record the refund as a $50 debit to revenue and an equivalent credit to cash.
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Sales Revenue (Revenue) | $50 | |
| XX-XX-XXXX | Cash (Asset) | $50 |
Shareholder investment
A long-term customer decides to invest $10,000 to increase your capacity to run your business. This earns you a short-term investment asset worth $10,000, which you add to the debit column. Because the money comes from an outside source, it would have an equity equivalent under the credit column.
| Date | Account | Debit | Credit |
| XX-XX-XXXX | Short-term investment (Asset) | $10,000 | |
| XX-XX-XXXX | Equity | $10,000 |
Summary
You can’t start your double-entry accounting journey without a solid understanding of debits and credits. The concept exists to help illustrate where value flows. It’s also helpful for balancing your books in double-entry accounting, reducing the risk of recording errors and fraud.
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Frequently asked questions
Why do banks record decreases as debits and increases as credits?
Your bank records debits and credits from its own perspective. Storing funds in a deposit account is equivalent to lending the bank money. This means your account counts as a liability on the bank’s ledger. Any debit to your bank account decreases the bank’s debt to you, and vice versa for credits.
Why is it important to know the difference between debits and credits?
Debits and credits are standardized labeling rules that ensure your books are balanced. Should you fail to understand which transactions increase or decrease the different types of bookkeeping accounts, you’re more likely to incur bookkeeping errors. This leads to miscalculations in account values and an inability to check for fraud properly.
Are debits or credits bad for your business?
Neither debits nor credits are bad for your business. Each label simply represents the direction in which your money flows. While there is no right or wrong direction, money flowing into the right place will yield more value to your business, allowing it to grow and operate effectively.
For example, taking out a loan credit the loan balance to liabilities and debits cash to assets. Credit isn’t inherently bad for business; it’s about where you intend to invest your cash.
