Debit vs. credit in accounting: Guide, examples, and best practices

Knowing exactly how money flows into and out of your company is key to successful financial control, and debit vs. credit accounting (or double-entry accounting) allows you to track both confidently. And as a result, you're able to effectively manage cash flow, avoid overspending, secure loans, and make better decisions. 

According to a recent QuickBooks survey, 85% of small business owners use accounting software or apps to manage their finances—highlighting the widespread need for digital tools to help you keep your finger on the pulse when it comes to your business finances.

In this article, you’ll learn all about debits and credits in accounting, how to manage debit and credit entries in your bookkeeping software, and how to troubleshoot common debit and credit errors.

What are debits and credits in accounting?

What is a debit?

What is a credit?

Differences between debit and credit

Journal entry accounting

Should I use debit or credit?

Debit and credit examples

How do debits and credits affect different accounts?

3 rules of debit and credit

Tips for managing debit and credit entries

Common debit and credit scenarios for small businesses

Troubleshooting common debit/credit errors

Streamline your accounting and save time

What are debits and credits in accounting?

Before getting into the differences of 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 system differs from single-entry bookkeeping, a type of accounting practice that 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.

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.

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 of debits vs. credits 

The primary difference between credit vs. debit accounting is their function. Depending on the account, a debit or a credit will result in an increase or a decrease on the balance sheet. 

Here’s how each entry impacts different 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 functions 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

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.

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.

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?

If you can’t figure out whether to use a debit or a credit for a particular account, the balance sheet equation is an accounting formula that should help. It consists 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.

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 create 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 the transaction will impact, 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 is 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 who 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. 

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

Asset 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, 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.

3 rules of debit and credit

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

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

Fortunately, accounting software, like QuickBooks Online, often 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; it handles both sides of your transactions with just a few clicks. 

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.

QuickBooks replaces time-consuming manual data entry and allows for seamless bank reconciliation. Every day, the software collects transaction data from your bank account and other financial services providers, then imports it into your accounting records. Spend a minute or two each day approving each entry and benefit from up-to-date financials and the ability to spot discrepancies right away.

Common debit and credit scenarios for small businesses

Now that you’re familiar with debits and credits, the next step is to apply them in your bookkeeping. Here are three ways you’ll use them:

Setting up your chart of accounts 

For a small business, a chart of accounts is the best way to set up an organized system for monitoring your transactions. 

This master list of the “accounts” or categories your business uses to classify transactions typically includes Cash, Savings Accounts, Accounts Receivable, Accounts Payable, Payroll Liabilities, Expenses, and Common Stock. 

For example, here’s how the chart of accounts could record your initial investment in the business:

• Transaction: You put $10,000 of your own money into the business.
• Debit journal entry: Cash for $10,000 (increases your Asset account).
• Credit journal entry: Owner’s equity is valued at $10,000 (increases your Equity account).

The transaction is now perfectly balanced, showing the business has a new asset (cash) and an equal claim from the owner (equity).

Recording daily transactions

The best way to become familiar with debits and credits is to use your accounting software. Here's how they work in two very common scenarios you’ll handle:

Scenario 1: Invoicing a client and getting paid

You invoice a client for $500. This records the money they owe you:

• Debit Accounts Receivable for $500 (your clients now owe you more collectively)
• Credit Sales Revenue for $500 (showing your increasing earned income)

When the client pays the invoice, your cash increases, and they clear their debt:

• Debit your Cash account for $500 (your cash balance goes up) 
• Credit Accounts Receivable by $500 (because the money clients owe you collectively has gone down)

Scenario 2: Buying supplies

If you buy $200 of office supplies, the entries you make depend on how you paid:

• Pay by cash or debit card: Paying up-front increases your expenses and reduces your cash balance. So, you’d debit $200 from your Supplies Expenses account but credit your Cash account by $200.
• Pay by credit card: Delaying payment increases your expenses and creates a liability you still owe. In this case, debit your Supplies Expenses account for $200 and credit your Accounts Payable by $200.

Adjusting entries

Sometimes, you do the work in one month but don’t get paid until the next. In accounting, this means the income and payments happen in different periods. 

An adjusting journal entry is a core principle of accrual accounting. You make this special entry at the end of a period (like a month, quarter, or year) to assess how profitable you were during that time.

Here are two common examples:

• Finish a job before your client pays (accrued revenue): Let’s say you carry out $500 worth of work for a client in July but don’t invoice them until August. An adjusting entry would record that as revenue in July, the month you actually earned it.
• Paying upfront for a product or service (prepaid expense): If you paid $1,200 for a year’s insurance upfront in January, you’d make an adjusting entry of $100 each month (one-twelfth of $1,200) to spread the cost out.

Troubleshooting common debit/credit errors 

Even with careful bookkeeping, errors can occur. Below, discover how to spot mistakes, understand why they happen, and how to fix them.

Identifying imbalances in your books

You’ll usually discover an error in one of these two ways:

• Your books don’t match your bank statement after reconciliation, so you see a remaining balance when it should be zero.
• Your accounting software, like QuickBooks, alerts you when entering an unbalanced transaction (different debits and credit), catching the problem at the source.

A simple way to confirm whether there’s an imbalance is to run a trial balance. This shows you every closing balance of every account in your ledger. If your total credits don't equal your total debits, you need to find and fix the error(s). The next section explains some of the most common causes.

Common causes of debit/credit errors

Many debit/credit errors fall into one of these categories:

• Transpositions: This common accounting error refers to when you swap the order of digits in a sequence, like inputting $54 instead of $45.
• Omissions: An omission happens when you leave out one side of a transaction. For example, you might record a $100 cash sale by increasing your Cash account, but forget to credit your Revenue account.
• Duplication: This happens when you accidentally record the same transaction more than once, like entering a supplier bill twice.
• Incorrect account usage: This error occurs when you post an entry to the wrong account, like debiting a Liability account instead of the Expense account.
• Incorrect amount posted: You enter the wrong value due to a typo, like typing $100 for a $1,000 invoice.

Strategies for finding and correcting errors

Once you’ve confirmed there’s an imbalance, follow these steps to find the cause:

• Review your recent entries first: Most errors are quite recent. Start with your latest entries and work backwards week by week to find the problem.
• Compare your journal entries to the source documents: Check your bank statements, invoices, and receipts to look for mismatches.
• Use your accounting software: QuickBooks’ Audit Log shows you every change made to a transaction, helping you pinpoint when and where an error occurred.
• Reconcile your accounts regularly: Check every week or month to catch small errors before they turn into bigger, more time-consuming problems.

When to seek professional help

If you’ve spent a long time looking for an error but can’t find it or you’re unsure how to fix it, contact your accountant or bookkeeper.

Their experience, training, and familiarity with QuickBooks mean they often spot and fix more complex issues faster. It’ll be cheaper to use their services instead of losing billable hours trying to solve it yourself.

Plus, you’ll have the peace of mind knowing your books are accurate and ready for tax time. QuickBooks does a lot of the work, allowing you to cut back on the full cost of an accountant.

Streamline your accounting and save time

Understanding debit vs credit accounting is essential for accurate bookkeeping. Better bookkeeping means accurate and reliable financial statements, and they give you valuable business insights you can use to move your company forward.

Instead of spending time on manual journal entries and locating errors, use accounting software like QuickBooks. It connects directly to your bank feed to accurately import every transaction, giving you more time to run your business and make decisions based on reliable, real-time financial data.