Debit vs. credit in accounting: The ultimate guide and examples

Debits and credits in accounting

Before getting into the differences between debit vs. credit accounting, it’s important to understand that they actually work together.

In double-entry bookkeeping: 

• Every dollar amount entered as a debit must also equal the same amount entered as a corresponding credit, and vice versa
• Your two-sided debit and credit entries always balance out each transaction 

For example, let’s say you need to buy a new projector for your conference room. Since money is leaving your business, you would enter a credit into your cash account. You would also enter a debit into your equipment account because you’re adding a new projector as an asset. 

This is contrary to single-entry bookkeeping, which: 

• Only adds one positive or negative value per financial transaction

The double-entry system provides a more comprehensive understanding of your business transactions. Let’s go into more detail about how debits and credits work.

What is a debit?

A debit (or “DR” for short) is an accounting entry that increases assets (what your business owns) and decreases liabilities (how much your business owes). 

For example, if a business takes out a loan to buy new equipment, the firm would enter a debit in its equipment account because it now owns a new asset. The debit entry typically goes on the left side of a journal.

Pros of using debit cards

• Less debt: Since debit cards use the money you already have, using them avoids adding any debt.
• Some fraud protection: Certain debit cards like Visa and Mastercard offer more protections against fraud.
• No annual fee: Unlike credit cards, debit cards do not require annual fees.

Cons of using debit cards

• Fewer rewards: For the most part, you won’t earn points, miles, or cash back for debit card purchases.
• Doesn’t build credit: Even if you’re paying bills on time, you can’t establish a good credit history from debit card transactions.
• Other fees: Debit cards may require fees for monthly maintenance, overdrafts, returns, and foreign ATM use.

What is a credit?

A credit (or “CR” for short) is an accounting entry that decreases assets and increases liabilities.

For example, when paying rent for your firm’s office each month, you would enter a credit in your liability account. The credit entry typically goes on the right side of a journal.

Pros of using credit

• Good credit history: With timely payments and a low credit utilization ratio, your business can use credit to build a positive credit history.
• Warranty and protections: Credit may add protections for items your business purchases.
• Fraud prevention: Compared to debit, credit can more effectively protect against fraud.

Cons of using credit

• May increase debt: When spending money using credit accounts, your business accumulates more debt.
• Can impact credit score: Missing payments, maxing out cards, or making other errors can negatively impact your credit score.
• Lots of interest and fees: Every credit card company charges interest and fees for your short-term bank loans.

Differences between debit and credit

There are two main differences between debit and credit accounting: their function across different accounts and their placement in your journal entry. Here’s a more detailed explanation of each difference:

Function

The primary difference between debit vs. credit accounting is their function. Depending on the account, a debit or credit will result in an increase or a decrease. Here’s the effect of each entry on various accounts:

• Debit: increases asset and expense accounts; decreases liability, revenue, and equity accounts
• Credit: decreases asset and expense accounts; increases liability, revenue, and equity accounts 

You’ll notice that the function of debits and credits are the exact opposite of one another.

Placement

The other important distinction between debits and credits is their placement on your journal entry. As a general rule of thumb, follow this format when entering a transaction:

• Debit: always on the left side of an entry
• Credit: always on the right side of an entry

Learn exactly how to format your journal entries for debits and credits below.

Journal entry accounting

To accurately enter your firm’s debits and credits, you need to understand business accounting journals. A journal is a record of each accounting transaction listed in chronological order. Accountants post activity using a journal entry.

Debits and credits are used in each journal entry, and they determine where a particular dollar amount is posted in the entry. Your bookkeeper or accountant should know the types of accounts your business uses and how to calculate each of their debits and credits.

Accounting journal entry example

In double-entry bookkeeping, a T-account structure visually separates the debits and credits so you can make sure they're in balance. As an example, this journal entry is posted to record an asset purchase:

The debit increases the equipment account, and the cash account is decreased with a credit. Asset accounts, including cash and equipment, are increased with a debit balance.

The journal entry includes the date, accounts, dollar amounts, and the debit and credit entries. You’ll list an explanation below the journal entry so that you can quickly determine the purpose of the entry.

Your decision to use a debit or credit entry depends on the account you’re posting to and whether the transaction increases or decreases the account.

Should I use debit or credit?

Can’t figure out whether to use a debit or credit for a particular account? The balance sheet formula should give you the answer. The equation is comprised of assets (debits) which are offset by liabilities and equity (credits). You’ll know if you need to use a debit or credit because the equation must stay in balance.

Learn more details about the elements of a balance sheet below.

Balance sheet formula

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

• Assets: what your business owns
• Liabilities: what your business owes to other parties
• Equity: the difference between assets and liabilities, or the true value of your business

The components are connected by the balance sheet formula (or accounting equation):

Assets = liabilities + equity

The formula is used to create the financial statements, and the formula must stay in balance.

How to do a balance sheet

Assets on the left side of the equation (debits) must stay in balance with liabilities and equity on the right side of the equation (credits).

Assume, for example, that a firm issues a $10,000 bond and receives cash. The company posts a $10,000 debit to cash (an asset account), and a $10,000 credit to bonds payable (a liability account).

Here’s the impact on the balance sheet formula:

$10,000 increase assets = $10,000 increase liabilities + $0 change equity

Implementing accounting software can help ensure that each journal entry you post keeps the formula and total debits and credits in balance.

What is a general ledger?

A company’s general ledger is a record of every transaction posted to the accounting records throughout its lifetime, including all journal entries. If you’re struggling to figure out how to post a particular transaction, review your company’s general ledger. 

The data in the general ledger is reviewed, adjusted, and used to create the financial statements. Review activity in the accounts that will be impacted by the transaction, and you can usually determine which accounts should be debited and credited.

Debit and credit examples

When learning bookkeeping basics, it’s helpful to look through examples of debit and credit accounting for various transactions. In general, debit accounts include assets and cash, while credit accounts include equity, liabilities, and revenue. 

Check out these examples of journal entries for each type of account:

Assets

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

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

Cash

Cash in your bank account is also an asset account. This entry is posted to record $5,000 in cash received when a customer pays an invoice on April 2:

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

Equity

The owner's equity and shareholders' equity accounts are the common interest in your business, represented by common stock, additional paid-in capital, and retained earnings. The balance is increased with a credit. 

Let’s assume that, on April 3, a company increases common stock by $1,000 and additional paid-in capital by $6,000 when it issues stock for $7,000 in cash. Here’s the entry:

Now, you see that the number of debit and credit entries is different. As long as the total dollar amount of debits and credits are equal, the balance sheet formula stays in balance.

Liabilities

Liabilities are amounts owed to third parties, such as your accounts payable, notes payable, and bank loans. Here’s an April 4 entry to record $12,000 in IT expenses that are 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 the accounting treatment for each:

• 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. 
• When you swipe your card at an ATM, you’re decreasing the cash balance. Reconcile your bank account immediately after month-end to avoid overdraft charges and unnecessary fees.

Revenue

Revenue accounts represent the sales of your business's products and services. This April 5 entry posts $15,000 in sales to customers that are paid in cash:

Both cash and revenue are increased, and revenue is increased with a credit.

As you process more accounting transactions, you’ll become more familiar with this process. Take a look at this comprehensive chart of accounts that explains how other transactions affect debits and credits.

How do debits and credits affect different accounts?

Both debits and credits can either raise or lower the balances in different accounts, depending on the account type involved. Let’s break down how these entries can affect these account types:

Assets

Assets accounts track valuable resources your company owns, such as cash, accounts receivable, inventory, and property.

Debits boost your asset accounts because they represent a gain in resources. For example, if you stock up on new inventory, more resources are coming into your company.

On the other hand, credits lower your asset accounts. Spending cash, selling inventory, or customers paying down their debts are all examples of credits since these resources are leaving your company.

Liabilities

Liability accounts detail what your company owes to third parties, such as credit card companies, suppliers, or lenders.

Credits raise the balance of liability accounts. For instance, when you make a purchase on credit or take out a loan, you credit your liability account because you’re adding to your financial obligations.

Conversely, debits lower your liabilities. When you make a payment on a loan or settle a bill, you debit the account, which reduces what you owe.

Equity

Equity accounts represent your ownership in the company, including things like stocks, retained earnings, and any contributions from you or other investors.

Credits increase your equity because they show value being added to your business. For instance, when your company keeps profits instead of paying them out, or when you or an investor puts in more capital, you credit the equity account to reflect the growth in ownership.

Debits decrease your equity, usually when you pay out dividends, experience losses, or withdraw funds from the business.

Revenue

Revenue accounts track the sales of your products or services. 

Credits boost your revenue accounts since they represent income your business has earned. For example, when a customer makes a purchase, you credit your revenue account, which increases your total income.

However, debits lower your revenue. This happens when you issue a refund, apply a discount, or adjust for an error because you’re taking from your total income.

Expenses

Expense accounts record the costs associated with running your business — e.g., salaries, rent, and marketing expenses. 

Debits increase your expense accounts because they represent money going out. For instance, when you pay your employees, you debit the expense account to show the outflow of cash for wages.

On the flip side, credits reduce your expense accounts. This might happen if you adjust or reverse the expenses you previously recorded. For example, For example, let’s say you were charged for a service you didn’t end up using, and the vendor issued a refund. You would credit the expense account for that service to reflect the refunded amount.

Rules of debit and credit

When posting transactions, you’ll want to avoid common accounting errors. Here’s a summary of the rules you need to follow when performing debit and credit accounting:

• The total dollar amount posted to each debit account must always equal the total dollar amount of credits. 
• The number of debit and credit entries, however, may be different.
• The double-entry accounting method requires each journal entry to have at least one debit and one credit entry.

Fortunately, accounting software requires each journal entry to post an equal dollar amount of debits and credits. If the totals don’t balance, you’ll get an error message alerting you to correct the journal entry.

Tips for managing debit and credit entries

Remembering all this information can be a little overwhelming, but there are a few tips to help you grasp these fundamentals and manage your entries effectively.

Know your account types

As mentioned earlier, each account behaves differently with debits and credits. Figure out a way to help you memorize that:

Assets and expenses increase with debits and decrease with credits

Liabilities, equity, and revenue increase with credits and decrease with debits.

You could write this information on a sticky note and keep it near your workspace as a quick reference. Over time, it’ll become second nature to you.

Use the double-entry bookkeeping system

Double-entry bookkeeping is the foundation of accurate accounting. For every transaction, you’ll need to record both a debit and a corresponding credit in two different accounts. For example, when you buy inventory, you’ll debit your inventory account and credit your cash or accounts payable account. Ultimately, this system helps keep your books balanced and helps make sure nothing slips through the cracks.

Reconcile your accounts regularly

Make it a habit to reconcile your accounts with your bank statements regularly — whether that’s weekly or monthly. In other words, compare your records to your bank balance to ensure everything matches. This process helps spot errors early, like missed transactions or duplicate entries and can prevent small discrepancies from turning into larger issues.

Use accounting software

Managing debits and credits by hand can take up a lot of time and leave room for mistakes. That’s why accounting software is so useful. With just a few clicks, the software handles both sides of your transactions. For example, when you record a sale, it automatically debits your cash or accounts receivable and credits your revenue account, so you don’t have to do it manually.

It can also help you reconcile your bank accounts, generate financial reports, and keep track of expenses without all the manual work. Ultimately, the right accounting software can help you stay more organized, reduce errors, and give you a better picture of your company’s financial health.

Accounting tools can make all the difference

To ensure that everyone is on the same page, try writing down your accounting routine in a procedures manual and use it to train your staff or as a self-reference. Even if you decide to outsource bookkeeping, it’s important to discuss which practices work best for your business. 

Not sure which angle to take? Talk to bookkeeping experts for tailored advice and services that fit your small business.