In accounting, debits increase assets and decrease liabilities and equity, whereas credits increase liabilities and equity and decrease assets. Understanding the difference between a debit and a credit is key to accurate accounting for your business, but keeping them straight can be tricky.
Remember that every business transaction affects at least two accounts — one is debited, and the other is credited — ensuring the accounting equation (Assets = Liabilities + Equity) stays balanced.
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Effect on account |
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Other notes about debits vs credits
Not only does “debit” sound very similar to “debt,” but people will sometimes use the terms “debit” and “credit” interchangeably even though they don’t mean the same thing. For insurance, in everyday conversation, you might hear bank tellers say that money has been credited to a bank account (meaning that a deposit has been made) when they actually mean that the money has been debited to an account.
From the bank’s perspective, the money you deposit is a liability because it owes it to you. That’s why it says it’s “credited to your account.” However, in your own accounting books, that deposit is an asset, so you record it as a debit.
Fortunately, accounting software automatically categorizes each new transaction as either a debit or a credit, making it super easy to keep track of everything. All you have to do is review each transaction to ensure it’s been properly categorized.
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Capable accounting software can help you track debits and credits and keep you on top of your business finances. Our top recommendation for small and midsize businesses is QuickBooks Online. It not only handles accounting tasks with ease but also integrates with 700+ apps and simplifies tax calculations and filings. |
It’s also crucial to distinguish accounting debits from debit cards. While accounting debits affect financial records, a debit card is a banking tool linked to a checking account, allowing users to spend only the available funds in that account.
On a similar note, credits in accounting should not be confused with credit cards. Credit cards provide a line of credit to users, and they borrow against that credit line as they make purchases. Credit cards charge interest on the amount borrowed unless the amount is paid off in full during the grace period.
How debits and credits are used
To understand how debits and credits are used, you first need to know the five main types of business accounts:
- Assets: Items that provide future economic benefits for the company, such as accounts receivable, inventory, and equipment.
- Liabilities: Obligations that a company must pay, e.g., accounts payable and loans.
- Equity: Money or property that could be returned to owners or shareholders if all company assets were liquidated and all debts were paid off.
- Revenue: Income earned from the sale of goods or services.
- Expenses: Cost of operations that are incurred to do business, e.g., rent, cost of goods sold, and wages.
This handy chart summarizes how debits and credits affect the various types of accounts:
| Debit | Credit | |
|---|---|---|
| Assets |
Increases ⬆︎ |
Decreases ⬇︎ |
| Liabilities |
Decreases ⬇︎ |
Increases ⬆︎ |
| Equity |
Decreases ⬇︎ |
Increases ⬆︎ |
| Revenue |
Decreases ⬇︎ |
Increases ⬆︎ |
| Expenses |
Increases ⬆︎ |
Decreases ⬇︎ |
Debits and credits are used to record each transaction in the business. In double-entry accounting, all entries must balance each other out. So, if you debit one account, you must also credit one or more accounts.
For example, if you take out a $5,000 loan for your business, you would debit your cash account to represent the proceeds of the loan. Then, you would credit the same amount to loans payable to represent the debt you must now pay off. We’ll explore more examples of using debits and credits in the next section.
Examples of debits and credits
Let’s take the sample above of the business loan and see how the credit and debits would be logged in your accounting entries.
| Date | Account | ||
|---|---|---|---|
| 01/01/202X | Cash | ||
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Loans payable |
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Now, let’s consider a slightly more complicated scenario. Say your company sells office supplies, and a customer purchases five reams of paper for $30 each. The customer also pays a 10% sales tax on top of the purchase, so the total they give you is $165, consisting of $150 for the total price of paper ($30 × 5 reams) plus the $15 sales tax ($150 × 0.10).
The reams of paper originally cost you $10 each, so your cost of goods sold is $50 ($10 × 5 reams). Here’s how you would record all this information as credits and debits.
| Date | Account | ||
|---|---|---|---|
| 01/01/202X | Cash |
$165 |
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| Cost of goods sold |
$50 |
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Sales |
$150 |
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Inventory |
$50 |
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Sales tax payable |
$15 |
As you can see, the credits and debits balance each other out exactly.
Tip: Logging debits and credits may seem complex, but the best accounting apps will do the heavy lifting for you. Accounting software will automate most calculations and categorization, making it easy to maintain accurate books and manage your company’s finances.
Tips for making debit and credit entries
- Identify the affected accounts. Determine which accounts are impacted by the transaction and whether they are assets, liabilities, equity, revenue, or expenses.
- Understand the effect on each account. Decide whether the transaction increases or decreases the affected accounts and apply the correct debit or credit.
- Use the accounting equation. Ensure that the equation Assets = Liabilities + Equity remains balanced after recording the entry.
- Follow the double-entry rule. Check that every transaction has at least one debit and one credit entry of equal value to maintain balance.
- Use consistent formatting. Clearly label debits and credits and align them properly in journal entries to prevent errors.
- Check for accuracy. Review journal entries regularly to ensure they are correctly recorded and balanced before posting to the general ledger.
- Memorize key account rules. Remember that assets and expenses increase with debits, while liabilities, equity, and revenue increase with credits.
- Utilize accounting software. Use accounting software to automate and minimize errors in data entry if you’re managing large volumes of transactions.
Frequently asked questions (FAQs)
Is debit money in or out?
A debit isn’t always money coming in or out — it depends on the type of account. In asset and expense accounts, a debit increases the balance, which can mean money coming in, like when you deposit cash into your bank account. Meanwhile, in liability, equity, and revenue accounts, a debit decreases the balance, such as when you make a payment toward a loan, reducing what you owe. So, while a debit can represent an inflow of money in some cases, it can also indicate a reduction in liabilities or other balances.
Is debit positive or negative?
A debit is neither inherently positive nor negative. Whether it is seen as an increase or decrease depends on the account type. For assets and expenses, debits increase the balance. For liabilities, equity, and revenue, debits decrease the balance.
Is credit balance positive or negative?
A credit balance is typically positive in accounts with a normal credit balance, such as liabilities, equity, and revenue accounts. In these cases, a credit adds to the account rather than reduces it.
