Debit vs Credit in Accounting: What’s the Difference?

If you're new to bookkeeping, the terms "debit" and "credit" can be a bit confusing—but once you understand the basics, they’re actually pretty straightforward.

In this guide, we’ll explain what debit and credit actually mean and how they’re used in journal entries. We’ll look at why they’re so important for balancing your books, and walk through some examples to make everything easier to understand.

Debit vs credit accounting: Definition

Modern accounting uses a system called double-entry bookkeeping, where every financial transaction affects at least two accounts. "Accounts" are categories used to track and record different types of financial transactions—like sales, expenses, assets, and liabilities. Each account shows the running balance of a specific item, helping you understand where money is coming from and where it's going. 

To track these changes correctly, you use two types of entries: debits and credits. Every time you record a transaction, you need both debit and credit entries that equal each other. This balance keeps your financial records accurate and helps catch mistakes.

Remember, debits and credits always work together. Every debit needs a matching credit of the same value, though they affect different accounts depending on the type of transaction.

What is a debit in accounting?

In simple terms, a debit is an entry on the left side of your accounting records. Debits typically increase asset and expense accounts, and decrease liability, equity and revenue accounts.

Accounts that increase with a debit include:

• Dividends: These are increased with a debit when a business pays dividends to its shareholders.

• Expenses: When you incur costs—like rent or utilities—you increase your expense accounts with a debit.

• Assets: Purchasing equipment, inventory, or supplies increases asset accounts through a debit entry.

• Losses: Any financial loss is recorded as a debit, increasing the loss account.

What is a credit in accounting?

Credits do the opposite to debits. They increase in liabilities, equity and income accounts—and decrease assets. If something brings money into your business, or represents money you owe, chances are you’re making a credit entry.

Here are some types of accounts that increase with a credit:

• Gains: Unexpected income that isn't part of your normal business.

• Income: Money received from activities outside your main business.

• Revenues: Money earned from your main business activities increases with credits, showing money flowing into your business.

• Liabilities: Money your business owes to others increases with credits, showing you've taken on more obligations.

• Stockholders' (Owner's) Equity: The owners' stake in the business increases with credits, showing additional investment or profits that are kept in the business.

The importance of debits and credits

Understanding debit and credit bookkeeping is essential for accurate accounting. Together, they form the backbone of the double-entry accounting system, which ensures that every transaction is recorded correctly. It also makes sure your books are balanced.

For every transaction, what you debit must equal what you credit—if it doesn’t, there may be a mistake in your books that you need to fix.

Good news—accounting software like QuickBooks handles the rules of debit accounts and credit accounts automatically. For small business owners, understanding debit vs credit means you can talk confidently with your accountant and understand your financial position with more independence.

Journal entry: Example

Journal entries are records of your business transactions found in reports like the general ledger (more on this in a moment). Each entry includes at least one debit and one credit, along with the date, accounts affected and a brief explanation.

Here's a simple example of buying equipment:

In this example, the equipment account shows a $3,000 debit, while the cash account shows a $3,000 credit—this means that the accounts are balanced.

Debit and credit rules

Whether you should use a debit or credit entry depends on the account you are posting to and whether the transaction increases or decreases the account. Here are the key rules that guide how debit vs credit entries work in accounting:

• Debits must equal credits in every transaction

• Debits go on the left, credits on the right

• Debits increase assets and expenses

• Credits increase liabilities, equity and revenue

• Each debit has a matching credit

Using debits and credits to keep your balance sheet in check

Your balance sheet gives a snapshot of your business’s financial position. It shows your assets, liabilities and equity. Debit account and credit account entries play a key role in keeping everything balanced. 

Balance sheet formula

A balance sheet shows your business’s assets, liabilities and equity as of a specific date. Here are the components of a balance sheet:

• Assets: What your business owns. Assets are resources that are used to produce revenue—such as cash, equipment, inventory, and other resources.
• Liabilities: What your business owes to others—think accounts payable, long-term debt and unpaid bills.

• Equity: The value of your business to its owners. Equity is always the difference between assets and liabilities. You can think of it as the true value of your business.

These components are connected by the balance sheet formula:

Assets = Liabilities + Equity

Take note of this formula—it’s the foundation of accounting!

Keeping the formula in balance

When recording debit and credit entries, they must always fit the balance sheet formula. Remember: Assets = Liabilities + Equity.

Let’s say your business issues a $10,000 bond and receives cash. You need to make sure you debit and credit the right accounts in order to keep the formula balanced. Here’s what the entries would look like:

The equation stays balanced:

$10,000 Assets (Cash) = $10,000 Liabilities (Bonds Payable) + $0 Equity

Debit and credit cheat sheet

This debit vs credit cheat sheet will help you remember how to post transactions to each type of account:

The easiest way to remember the information in the chart is to memorise when a particular type of account is increased. Assets, for example, are increased with a debit entry. From there, accounting software can make sure that each journal entry maintains a balance of debits and credits.

Debits and credits in everyday business accounting transactions

You’ll use debits and credits daily in your bookkeeping. Here’s how they show up in common transactions:

When to debit and credit

Understanding when to debit versus credit an account is essential for accurate bookkeeping. Every transaction your business makes affects at least two accounts, and choosing the correct entry type is important to keep your books in balance.

In this section, we’ll walk through how the general ledger works and explore real-world debit and credit examples to help you feel more confident when recording transactions.

General ledger

Your general ledger is like your business' financial diary. It organises all of your accounts and their balances. The data in the general ledger is frequently reviewed and adjusted, and used to create financial statements. Knowing when to use credit vs debit entries in the ledger ensures that the records stay accurate.

Here are some common examples:

Debit Examples

You should debit an account to increase:

• Cash: When you receive money

• Accounts receivable: When a customer owes you
• Inventory: When you buy stock

• Expenses: When you pay bills or wages

Example 1: Are assets a debit or credit?

Assets are resources used to produce revenue, and they are increased with a debit. Here’s an entry to purchase $10,000 of inventory on credit on 1 April:

This entry increases inventory (an asset account) and increases accounts payable (a liability account).

Example 2: Is cash a debit or credit?

Both cash and accounts receivable are asset accounts. This entry is posted to record $5,000 in cash received when a customer pays an invoice on 2 April:

Cash is increased with a debit, and the credit decreases the accounts receivable. The balance sheet formula remains in balance because assets are increased and decreased by the same dollar amount.

Here are some credit examples:

Credit examples

You should credit an account to increase:

• Liabilities: When you take out loans and owe payments on bills

• Equity: When you issue shares

• Revenue: When you make a sale

Example 1: Is equity a debit or credit?

An equity account may include ordinary shares or retained earnings. The balance is increased with a credit. Let’s assume that, on 3 April, a company increases its ordinary shares by $1,000 and additional paid in capital by $6,000 when it issues stock for $7,000 in cash. Here’s the entry:

As long as the total dollar amount of the debits and credits are equal, the balance sheet formula stays in balance.

Example 2: Are liabilities a debit or credit?

Liabilities are amounts owed to third parties. Here’s a 4 April entry to record $12,000 in IT expenses that were not paid in cash immediately:

The expense account is increased with a debit, and the liability account is increased with a credit. Here are some other payment situations and how you can treat of them to balance the books:

• If you pay with a credit card, you have a liability balance with the credit card company. Getting cash back with a purchase increases your debt.
• Debit card payments reduce your checking account balance and are considered a use of cash. But remember—a "debit card" isn’t the same as debit and credit rules explained here.
• When you swipe your card at an ATM, you’re decreasing the cash balance. Reconcile your bank account immediately after the end of the month to avoid overdraft charges and unnecessary fees.

Example 3: Is revenue a debit or credit?

This 5 April entry posts $15,000 in sales to customers that are paid in cash:

Cash increases with a debit. Revenue increases with a credit.

When you need to post a new entry, a good first step is to decide if the transaction impacts cash—it’s the account that includes the most accounting activities.

Using credit to operate your business

When cash flow is tight, credit can help fund your operations. Whether you're using business credit cards or a line of credit, these financing tools can provide much-needed liquidity—but they come with interest charges and affect your business credit history.

If you use credit cards, monitor your accounts regularly to catch fraudulent charges and ensure timely payments. While credit card perks can be beneficial, they shouldn't drive your decision to use credit, as the high interest rates can quickly outweigh the benefits.

Limiting credit card spending and developing strong cash flow are better long-term strategies for business financial health.

Accurately manage your accounting

QuickBooks makes it simple to apply debit and credit rules correctly. Whether you’re doing the books yourself or working with a bookkeeper, QuickBooks helps you stay on top of your finances—one entry at a time.