Debit vs. credit in accounting: What small businesses need to know

Accurate bookkeeping is important, whether you're recording a sale, settling a bill, or taking out a loan. Not knowing when or how to enter debits vs. credits in your accounting ledger could lead to costly errors that are hard to find and even harder to fix before tax season. But according to a QuickBooks report, small business owners lose an average of $118,121 in profit due to low financial literacy.

In this guide, we explain debits and credits in plain terms and show how bookkeeping software like QuickBooks Online can handle most of the accounting for you automatically.

What is a debit in accounting?

A debit (or "DR" for short) is an accounting entry that increases your assets (things your business owns) and expenses, and decreases your liabilities (what your business owes), equity (your ownership stake in the business), and revenue.

Debits are one of the first things covered in any definition of bookkeeping and go on the left side of a journal entry. A journal is the record your business keeps of all its financial activity. So, if your business takes out a loan to buy new equipment, you'd enter a debit in your equipment account because your business now owns a new asset.

Here's how debit entries can look across a typical month of transactions:

What is a credit in accounting?

A credit (or "CR" for short) is an accounting entry that increases liabilities, equity, and revenue, and decreases assets and expenses. Credits always go in the right- hand column.

Here's an example of how the transactions from the debits above would appear as credits in a journal entry:

Debit vs. credit: What’s the difference?

The difference between debits and credits is the type of account they increase or decrease. The two are mirrors of each other, so every transaction records a debit in one account and a matching credit in a different account. This balance is what keeps your financial statements accurate.

This table shows you a quick summary of the differences:

How debits and credits work in double-entry bookkeeping

Double-entry bookkeeping means every transaction you record requires at least one debit and one credit of equal amounts, because both sides of the entry must always be equal.

That balance is based on the core accounting formula:

Assets = Liabilities + Equity

In simple terms, the equation shows that if a business has something, there must be a reason it has it and a way it was paid for. That usually means borrowed money, the owner's money, or money the business has made.

A version of the formula in more detail is:

Assets + Expenses = Liabilities + Equity + Revenue

Accounts on the left side of the equation (assets and expenses) increase with a left-side entry, which is a debit. Accounts on the right side (liabilities, equity, and revenue) increase with a right-side entry, which is a credit.

For example, your business borrows $5,000 to buy equipment. You debit your equipment account (an asset on the left) by $5,000 while crediting your loan payable account (a liability on the right) by $5,000. This balances the formula, and your accounts show exactly what the business owns and what it owes.

Must-know credit and debit rules

The core debit and credit rules are that each account type has a normal balance, or the side of the ledger it naturally falls on. Your general ledger uses these normal balances to track running totals. Accountants often use T-accounts to visualize this, which are simple T-shaped diagrams with debits on the left and credits on the right.

Here's a normal balance cheat sheet showing how each account type behaves:

If an account shows a balance on the opposite side to its normal balance, it usually means there's a data entry error or an overpayment that needs correcting.

If you spot a credit balance in your cash account, for example, when reading a balance sheet, it would mean the numbers suggest you've spent more cash than you have, which is an obvious sign something has been entered incorrectly.

QuickBooks automatically highlights entries that are out of balance before they're saved, making it much easier to catch and correct mistakes like these before they affect your bank reconciliation.

Examples of credits and debits

Examples are one of the fastest ways to understand how debits and credits apply to everyday transactions. These three entries cover the most common scenarios:

Buying equipment with cash

Making a sale on credit

Paying a bill

5 accounts and how debits and credits affect them

Both debits and credits can either raise or lower the balances in different accounts, depending on the account type involved. Here's how each account type is affected:

1. 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 an increase in what you own. Stock up on new inventory, for example, and more is coming into the business.

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.

2. Liabilities

Liability accounts record what your business 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.
• Debits lower your liabilities. When you make a payment on a loan or settle a bill, you debit the account. This reduces what you owe, so your accounts payable balance falls.

3. Equity

Equity accounts represent your ownership in the business. This includes owner's equity, 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.

4. 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. With QuickBooks Payments, customers can pay you by card, ACH, or digital wallet directly through your invoice, and it automatically records each in your books.
• 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.

5. 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. When you pay your employees, for example, you debit the wages expense account to record the outflow. QuickBooks' Payroll Agent collects your team's worked hours, catches missing or mismatched time entries before it’s time to run payroll, and records each wage expense like overtime and bonuses automatically.
• On the flip side, credits reduce your expense accounts. If a vendor charges you for a service you didn't receive and then issues a refund, you credit the expense account to reverse the original entry.

When should you use debits and credits?

There are a handful of situations where you'd need to record a manual journal entry yourself, including:

• Corrections: Fixing an entry that was posted incorrectly
• Depreciation: Recording the gradual reduction in value of an asset, like a vehicle or equipment
• Accruals: Recording income or expenses that have been earned or incurred but not yet paid
• Owner contributions or withdrawals: When you put money into the business or take it out personally

QuickBooks automates most debit/credit entries behind the scenes. For example, when you send an invoice, receive a payment, or record an expense, it creates the correct journal entry. This keeps your books accurate without you having to think about which side of the ledger each transaction belongs on.

Spend more time growing your business

Debits and credits are the basis of accurate accounting. When you know you correctly record your transactions, you work from accurate numbers. You can base decisions on what your business owns, what it owes, and what it earns with confidence.

QuickBooks Online automatically records every invoice, payment, and expense, so the debits and credits in your books stay balanced and reliable. Start your free trial today.