Track 1 · Debits, credits and double entry
Debits and credits
The debit and credit rules for assets, liabilities, equity, income and expenses, and why every entry has equal debits and credits.
You will be able to
- State which side increases each type of account.
- Translate increases and decreases into debits and credits.
- Find the balance of a T-account.
- Explain why debits always equal credits.
Builds on
In double-entry bookkeeping every account has two sides. Picture it as a letter T: the account name across the top, the debit side on the left and the credit side on the right. Debit simply means left and credit means right. Neither word means good or bad, and neither means "money in" or "money out" on its own.
Where the rules come from
The rules follow from the accounting equation, Assets = Liabilities + Equity:
- Assets sit on the left of the equation, so they increase with debits (left) and decrease with credits.
- Liabilities and equity sit on the right, so they increase with credits (right) and decrease with debits.
- Revenue increases equity, so revenue is recorded with credits.
- Expenses and dividends reduce equity, so they are recorded with debits.
A handy memory aid is DEAD CLIC: Debits increase Expenses, Assets and Dividends; Credits increase Liabilities, Income and Capital (equity).
Why debits always equal credits
Every transaction is recorded with equal debits and credits. That is what keeps the equation balanced: if assets increase by 500 (a debit), something must be credited 500 — another asset decreasing, a liability or equity increasing, or revenue being earned. If a set of entries doesn't have equal debits and credits, an error has been made somewhere.
The bank statement trap
Your bank statement is written from the bank's point of view. To the bank, your deposit is money it owes you — a liability — so when you pay money in, the bank credits your account. In your books the same deposit is an increase in your asset, Cash at bank: a debit. When reading a bank statement, flip its debits and credits.
| Account type | Increase | Decrease | Normal balance |
|---|---|---|---|
| Assets | Debit | Credit | Debit |
| Expenses | Debit | Credit | Debit |
| Dividends / drawings | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Equity (share capital, retained earnings) | Credit | Debit | Credit |
| Revenue and income | Credit | Debit | Credit |
| Debit (money in) | Amount | Credit (money out) | Amount |
|---|---|---|---|
| Shares issued | 20,000 | April rent | 800 |
| Northgate Bank loan | 18,000 | Insurance for 12 months | 2,400 |
| Café menu, paid on the spot | 650 | Laptop | 2,880 |
| Total debits | 38,650 | Total credits | 6,080 |
| Balance (debit) | 32,570 |
Balance = larger side − smaller side, on the larger side. Cash has a debit balance because it's an asset.
Interactive
Practice the rules
Find the side for any increase or decrease in any account type.
Examples: Cash, receivables, equipment.
Record as a
debit
Asset accounts have a normal debit balance, so an increase goes on the same side.
Practice
Practising as a guest — attempts aren't saved.
Exercise 1 · Classify
Is each change recorded as a debit or a credit?
Exercise 2 · Concept check
A colleague says: “Cash has a debit balance, so the company must be in debt.” What's wrong with this?
Exercise 3 · Concept check
On 4 May Lumen pays Oakline Furniture the 720 it owed for the desks and chairs bought on 3 April. Which pair of changes is recorded?
Exercise 4 · Concept check
On 9 April two monitors arrive and Lumen pays Pinecrest Electronics 960 by cheque. A trainee drafts the entry as: debit Equipment 960, debit Cash at bank 960. What's wrong?
Exercise 5 · Calculate
Lumen's Accounts payable T-account for April shows credits of 500, 720, 640, 2,000, 1,440, 1,000 (supplier invoices) and a debit of 500 (a payment). What is the balance at 30 April, and on which side? Enter the amount.
Exercise 6 · Journal entry
On 1 April Lumen borrows 18,000 from Northgate Bank at 8% a year, repayable over three years. The money arrives in Lumen's bank account the same day. Record the entry.
Exercise 7 · Journal entry
Challenge: Lumen's bank statement shows “Transfer from Hollybrook Florists — 3,600 CR”. It settles invoice LDS-0004, for the website Lumen finished and invoiced on 22 April. A junior colleague says: “The bank says CR, so we credit cash.” Record the correct entry in Lumen's own books.
Key points
- Debit = left, credit = right; no moral meaning.
- Assets, expenses and dividends increase with debits; liabilities, equity and revenue with credits.
- Every entry has equal debits and credits, which keeps A = L + E in balance.
- A bank statement is written from the bank's side — flip its debits and credits.
Content review: answers and figures are checked by automated tests against the accounting engine, and the text has had an internal review against the standards; independent review by a qualified accountant is pending.