Debits and credits explained, with the one rule you need

Debit and credit are the two sides of every account in double-entry bookkeeping. Debit means left, credit means right. That's all the words mean. A debit isn't bad news and a credit isn't good news — a business with a large debit balance in Cash is doing fine.

The one rule

Everything follows from the accounting equation: assets = liabilities + equity.

Assets are on the left of the equation, so assets increase on the left (debit). Liabilities and equity are on the right, so they increase on the right (credit). Each account decreases on the opposite side.

Revenue and expenses are part of equity. Revenue increases equity, so it's a credit. Expenses reduce equity, so they're debits. Dividends reduce equity too, so they're debits.

Why every entry balances

Every transaction changes at least two things, and the equation must still hold afterwards. So every journal entry has equal debits and credits. If cash goes up by 500 (debit), something must be credited 500: revenue earned, a loan received, or another asset going down.

Three entries beginners get wrong

Collecting from a customer. When a customer pays an invoice you already recorded, debit Cash and credit Accounts receivable. Don't credit revenue again — it was recorded when the work was done.

Paying a supplier. Debit Accounts payable (the liability goes down), credit Cash. Don't debit an expense again; it was recorded when the bill arrived.

Prepaying insurance. Paying a year of insurance in advance is debit Prepaid insurance (an asset), credit Cash. The expense is recognised month by month as the cover is used.

Contra accounts

Some accounts carry the opposite balance to the account they reduce. Accumulated depreciation is a credit that reduces equipment; the allowance for credit losses is a credit that reduces receivables; sales returns is a debit that reduces revenue. They follow the same rule — they just sit on the other side.

A memory aid that actually helps

Many people remember the debit side with DEALER: Dividends (or drawings), Expenses and Assets increase with debits; Liabilities, Equity and Revenue increase with credits. It's a shortcut for the table above, not a separate rule — if you can reason from the accounting equation, you'll never need it.

A worked example in T-accounts

Corran Garden Design starts trading. Here are four transactions and how each one is posted.

1. The owner invests 15,000 cash. Cash (asset) increases: debit Cash 15,000. Owner's capital (equity) increases: credit Capital 15,000.
2. It buys a mower for 3,200 on credit. Equipment increases: debit Equipment 3,200. Accounts payable increases: credit Accounts payable 3,200.
3. It invoices a client 2,600 for a garden redesign. Receivables increase: debit Accounts receivable 2,600. Revenue increases: credit Service revenue 2,600.
4. It pays fuel of 180 in cash. Fuel expense increases: debit Fuel expense 180. Cash decreases: credit Cash 180.

Posted to the ledger, the balances are:

Debit balances total 14,820 + 3,200 + 2,600 + 180 = 20,800. Credit balances total 3,200 + 15,000 + 2,600 = 20,800. They agree, which is the check a trial balance performs. And the equation holds: assets of 20,620 (cash 14,820 + equipment 3,200 + receivables 2,600) equal liabilities of 3,200 plus equity of 17,420 (capital 15,000 + revenue 2,600 − fuel 180).

Debits and credits on a bank statement

Your bank statement seems to use the words the other way round: money paid in is a "credit". That's because the statement is prepared from the bank's point of view. Your deposit is money the bank owes you — a liability in the bank's books, so the bank credits it. In your own books the same deposit increases your Cash asset, so it's a debit. Nothing is inconsistent; the two sets of books are mirror images.

Common mistakes

• Treating debit as "decrease" or credit as "increase". Whether a debit increases or decreases an account depends on the account type.
• Crediting revenue when cash comes in for an old invoice. The credit goes to Accounts receivable.
• Debiting an expense for an asset that lasts. Equipment, prepayments and inventory are assets first.
• Recording drawings or dividends as expenses. They reduce equity directly and don't affect profit.
• Unbalanced compound entries. When three or more accounts are involved, total both sides before you post.

Frequently asked questions

Why does Cash have a debit balance if the bank calls my deposits credits?

Because the bank statement is the bank's record of what it owes you. In your books, cash is an asset with a normal debit balance.

Can an account have both debits and credits?

Yes — most accounts do. The balance is the difference between the two sides, and it normally sits on the account's increase side.

Is a credit balance in an expense account wrong?

Usually it signals an error, such as a refund posted to the wrong account or a reversed entry. Investigate it.

Practise it

The free lessons on debits and credits and account types and normal balances have graded questions with feedback on every wrong answer. Use the debit or credit simulator to drill the rule and the T-account posting simulator to see balances build up. When you're ready, the Your First Day case and the Start from zero pathway put it into practice.