Debits and credits are the two sides of every accounting entry. A debit is an entry on the left side of an account, and a credit is an entry on the right side. Every transaction has at least one of each, and the totals are always equal.
The confusing part is that a debit increases some accounts and decreases others. Once you know which account types go which way, every journal entry follows the same three steps.
The rules: which accounts increase with a debit
| Account type | Increase | Decrease | Normal balance |
|---|---|---|---|
| Assets | Debit | Credit | Debit |
| Expenses | Debit | Credit | Debit |
| Dividends / Drawings | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Equity | Credit | Debit | Credit |
| Revenue | Credit | Debit | Credit |
How to record any transaction in 3 steps
- Name the accounts. Which two (or more) accounts does the transaction change?
- Increase or decrease? Decide what happens to each account.
- Apply the rule. Use the table above to turn each change into a debit or a credit. Check that the debits equal the credits.
8 examples with journal entries
1. The owner invests $10,000 cash
Cash (an asset) increases, so debit it. Owner's capital (equity) increases, so credit it. In a corporation, the credit goes to Common Stock instead.
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,000 | |
| Owner's Capital | 10,000 |
2. Buy equipment for $5,000 cash
Equipment increases (debit) and Cash decreases (credit). One asset is swapped for another.
| Account | Debit | Credit |
|---|---|---|
| Equipment | 5,000 | |
| Cash | 5,000 |
3. Buy $800 of supplies on account
Supplies increase (debit). The business now owes the supplier, so Accounts Payable, a liability, increases (credit).
| Account | Debit | Credit |
|---|---|---|
| Supplies | 800 | |
| Accounts Payable | 800 |
4. Provide services for $2,500 cash
Cash increases (debit). Revenue increases (credit).
| Account | Debit | Credit |
|---|---|---|
| Cash | 2,500 | |
| Service Revenue | 2,500 |
5. Provide services for $1,200 on account
The customer will pay later, so Accounts Receivable increases (debit) instead of Cash. Revenue is still recorded now, because it has been earned.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 1,200 | |
| Service Revenue | 1,200 |
6. Pay $1,000 rent
Rent Expense increases (debit). Cash decreases (credit).
| Account | Debit | Credit |
|---|---|---|
| Rent Expense | 1,000 | |
| Cash | 1,000 |
7. Collect $1,200 from the customer in example 5
Cash increases (debit) and Accounts Receivable decreases (credit). No new revenue is recorded, because it was recorded in example 5.
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,200 | |
| Accounts Receivable | 1,200 |
8. Pay the $800 owed to the supplier
Accounts Payable decreases (debit) and Cash decreases (credit).
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | 800 | |
| Cash | 800 |
Common mistakes
- Thinking debit means bad and credit means good. They only mean left and right.
- Using your bank statement's wording. The bank describes your account from its side, so its debits and credits are the reverse of yours.
- Recording revenue only when cash arrives. Under accrual accounting, revenue is recorded when it is earned, as in example 5.
- Recording revenue twice. Collecting a receivable (example 7) is not new revenue.
Frequently asked questions
Is cash a debit or a credit?
Cash is an asset, so an increase in cash is a debit and a decrease is a credit. Cash normally has a debit balance.
Why does my bank call a deposit a credit?
Your bank writes from its own point of view. Your deposit is money the bank owes you, a liability, and liabilities increase with a credit. In your own books, the same deposit is a debit to Cash.
Is revenue a debit or a credit?
Revenue increases with a credit, because revenue increases equity. It normally has a credit balance.
Do debits always equal credits?
Yes. In double-entry accounting, every transaction is recorded with total debits equal to total credits, which keeps the accounting equation in balance.
Does debit mean good and credit mean bad?
No. Debit only means the left side of an account and credit means the right side. Whether that is an increase or a decrease depends on the type of account.