TutorialKart.comWhat Is Debit and Credit in Accounting?
Debit and credit are the two sides used to record every transaction in double-entry accounting. A debit is entered on the left side of an account, while a credit is entered on the right side. They do not automatically mean money received or money paid; their effect depends on the type of account being recorded.
Before preparing journal entries, identify the accounts affected, classify each account, and determine whether each account has increased or decreased. This accounting tutorial explains those steps with debit and credit examples.
1 Debit Meaning in Accounting
A debit, abbreviated as Dr., is an entry recorded on the left side of an account. A debit generally increases assets and expenses, while it decreases liabilities, equity, and income.
For example, when a business receives $5,000 in cash from its owner, the Cash account increases. Because Cash is an asset, the increase is recorded as a debit.
2 Credit Meaning in Accounting
A credit, abbreviated as Cr., is an entry recorded on the right side of an account. A credit generally increases liabilities, equity, and income, while it decreases assets and expenses.
In the same $5,000 owner-investment transaction, the owner’s Capital account increases. Because capital is part of equity, the increase is recorded as a credit.
3 Debit and Credit Rules by Account Type
To decide whether an amount should be debited or credited, first identify the relevant account and determine whether it is increasing or decreasing.
| Account type | Increase recorded as | Decrease recorded as | Normal balance |
|---|---|---|---|
| Assets | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Owner’s equity or capital | Credit | Debit | Credit |
| Revenue or income | Credit | Debit | Credit |
| Expenses | Debit | Credit | Debit |
| Drawings or withdrawals | Debit | Credit | Debit |
A simple way to remember the pattern is:
- Assets, expenses, and drawings increase with debits.
- Liabilities, equity, and revenue increase with credits.
The opposite entry is used when one of these accounts decreases.
4 Golden Rules of Debit and Credit
Traditional accounting education may classify account types as personal, real, and nominal accounts. The corresponding rules are known as the golden rules of accounting.
| Traditional account type | Debit rule | Credit rule |
|---|---|---|
| Personal account | Debit the receiver | Credit the giver |
| Real account | Debit what comes in | Credit what goes out |
| Nominal account | Debit expenses and losses | Credit income and gains |
The modern account-type rules and the traditional golden rules describe the same double-entry logic from different perspectives. The assets-liabilities-equity-revenue-expenses approach is often easier to apply when preparing financial statements.
5 How Debit and Credit Work in Double-Entry Accounting
Every transaction affects at least two accounts. The total debit amount must equal the total credit amount. This equality keeps the accounting equation balanced:
Assets = Liabilities + Owner’s Equity
For example, suppose a business buys equipment for $2,000 in cash:
- Equipment increases by $2,000, so Equipment is debited.
- Cash decreases by $2,000, so Cash is credited.
| Account | Debit | Credit |
|---|---|---|
| Equipment | $2,000 | |
| Cash | $2,000 |
The transaction changes the composition of assets but does not change total assets. One asset increases while another asset decreases.
6 Debit and Credit Journal Entry Examples
The following examples are recorded from the business’s point of view.
6.1 Owner Starts a Business with Cash
The owner invests $10,000 in the business.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Cash | $10,000 | Asset increases | |
| Owner’s Capital | $10,000 | Equity increases |
6.2 Business Borrows Cash from a Bank
The business receives a $5,000 bank loan.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Cash | $5,000 | Asset increases | |
| Bank Loan Payable | $5,000 | Liability increases |
The credit is recorded in a loan payable account, not in the bank’s name as an asset account.
6.3 Furniture Purchased on Credit
The business purchases furniture worth $3,000 from Neelkam Furniture on credit.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Furniture | $3,000 | Asset increases | |
| Accounts Payable—Neelkam Furniture | $3,000 | Liability increases |
6.4 Goods Purchased for Cash
The business purchases goods for resale for $1,200 in cash.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Purchases or Inventory | $1,200 | Purchases or inventory increase | |
| Cash | $1,200 | Asset decreases |
The exact debit account depends on whether the business uses a periodic inventory system, which uses Purchases, or a perpetual inventory system, which uses Inventory.
6.5 Goods Sold for Cash
The business sells goods for $2,500 in cash.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Cash | $2,500 | Asset increases | |
| Sales Revenue | $2,500 | Revenue increases |
Sales Revenue is credited because revenue increases equity. It is not debited as a decrease in an asset.
If a perpetual inventory system is used, an additional entry records the cost of the goods sold by debiting Cost of Goods Sold and crediting Inventory.
6.6 Cash Deposited into the Business Bank Account
The business deposits $800 of cash on hand into its bank account.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Bank | $800 | Bank asset increases | |
| Cash | $800 | Cash on hand decreases |
6.7 Cash Withdrawn from Bank for Office Use
The business withdraws $400 from its bank account for office cash.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Cash | $400 | Cash on hand increases | |
| Bank | $400 | Bank asset decreases |
6.8 Owner Withdraws Money for Personal Use
The owner withdraws $300 from the business bank account for personal use.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Drawings | $300 | Owner withdrawals increase | |
| Bank | $300 | Business asset decreases |
Drawings reduce owner’s equity, but withdrawals are normally accumulated in a separate contra-equity account during the accounting period.
6.9 Salary Paid to Employees by Check
The business pays employee salaries of $2,000 by check.
| Account | Debit | Credit | Reason |
|---|---|---|---|
| Salary Expense | $2,000 | Expense increases | |
| Bank | $2,000 | Bank asset decreases |
7 Debit and Credit on a Balance Sheet
Balance-sheet accounts generally follow these normal balances:
- Assets normally have debit balances. Examples include Cash, Bank, Accounts Receivable, Inventory, Equipment, and Buildings.
- Liabilities normally have credit balances. Examples include Accounts Payable, Loans Payable, and Accrued Expenses.
- Owner’s equity normally has a credit balance. Capital and retained earnings generally increase with credits.
A normal balance indicates the side on which an account usually increases. It does not prevent the account from occasionally having an unusual balance that requires investigation.
8 Debit and Credit in a Bank Statement
The terms debit and credit can appear reversed on a bank statement because the statement is prepared from the bank’s perspective.
- A deposit may appear as a credit on the customer’s bank statement because the bank owes more money to the customer. From the bank’s records, the customer’s deposit is a liability.
- A withdrawal, check, or bank fee may appear as a debit because it reduces the amount the bank owes to the customer.
In the business’s own accounting records, the Bank or Cash at Bank account is an asset. Therefore, a deposit into the business bank account increases the asset with a debit, while a withdrawal decreases it with a credit.
9 How to Determine Debit and Credit for a Transaction
- Identify the transaction. Determine what the business received, paid, earned, owed, purchased, or sold.
- Identify at least two affected accounts. Every complete double-entry transaction affects two or more accounts.
- Classify each account. Decide whether each account is an asset, liability, equity, revenue, expense, or drawings account.
- Determine whether each account increased or decreased.
- Apply the debit and credit rules. Assets and expenses increase with debits; liabilities, equity, and revenue increase with credits.
- Confirm that total debits equal total credits.
Consider a $600 electricity bill paid immediately in cash. Electricity Expense increases, so it is debited. Cash decreases, so it is credited. Both sides equal $600.
10 Common Debit and Credit Mistakes
- Assuming debit always means money coming in: A debit can record an expense or drawing even when cash is going out.
- Assuming credit always means money going out: Revenue and liabilities increase with credits even when no cash leaves the business.
- Crediting the bank instead of a loan liability: Borrowed money increases Cash and also creates a Loan Payable liability.
- Debiting Sales Revenue for a cash sale: Cash is debited and Sales Revenue is credited.
- Using the supplier’s name incorrectly: A credit purchase creates an Accounts Payable liability to the actual supplier.
- Recording only one side: Every journal entry must contain equal total debits and credits.
11 Debit and Credit Questions
What is debit and credit with an example?
A debit is an entry on the left side of an account, and a credit is an entry on the right side. If a business buys equipment for $1,000 in cash, Equipment is debited for $1,000 because the asset increases, and Cash is credited for $1,000 because the asset decreases.
Is debit money in or money out?
Debit does not always mean money in or money out. It increases assets and expenses but decreases liabilities, equity, and revenue. The account type determines the effect.
How can I remember debit and credit rules?
Remember that assets, expenses, and drawings increase with debits. Liabilities, equity, and revenue increase with credits. A decrease is recorded on the opposite side.
What is an example of a credit entry?
When a business earns $750 in service revenue for cash, Cash is debited for $750 and Service Revenue is credited for $750. The credit records the increase in revenue.
Why must debits equal credits?
Equal debits and credits preserve the balance of the accounting equation. If total debits and credits do not match, the journal entry is incomplete or contains an error.
12 Debit and Credit Editorial QA Checklist
- Confirm that every example contains equal debit and credit totals.
- Verify that asset and expense increases are debited.
- Verify that liability, equity, and revenue increases are credited.
- Check that cash sales credit Sales Revenue rather than debit it.
- Check that borrowed funds credit a loan liability rather than a bank asset account.
- Use the actual supplier account or Accounts Payable for credit purchases.
- State whether Purchases or Inventory is used when the inventory method affects the journal entry.
- Keep the business’s accounting perspective separate from the bank-statement perspective.
Debit and Credit Accounting Summary
Debit means the left side of an account, and credit means the right side. Assets, expenses, and drawings normally increase with debits. Liabilities, owner’s equity, and revenue normally increase with credits. For every transaction, identify the affected accounts, determine whether each account increased or decreased, and make sure total debits equal total credits.