Accounting 101: Debits and credits explained (2024)

Whether you’re an accounting enthusiast or an adamant arithmophobe, accurate bookkeeping is essential to your success. It’s how you generate invoices, compensate your staff, pay your bills and measure your business’s overall financial well-being.By having a clear view of your cash flow with detailed financial records, you can budget more easily, track your profits and identify strategic ways to grow.

But there are two bits of accounting jargon that often leave new business owners scratching their heads — debits and credits.

What exactly does each term mean? How can debits make some accounts go down but make others go up? And how does any of this affect your business?

Here’s what you need to know.

The basics of DR and CR

To keep your business’s financial records in order, you need to track the money coming in and going out — also known as balancing your books. The individual entries on a balance sheet are referred to as debits and credits.

Debits (often represented as DR) record incoming money, while credits (CR) record outgoing money.

How these show up on your balance sheet depends on the type of account they correspond to.

What “balance” really means

Any business that’s spending and receiving money will likely assign transactions to one of five main account types:

  • Asset accountscontain the resources a company relies on to generate revenue (inventory, accounts receivable, cash).

  • Expense accounts reflect the company’s cost of doing business (delivery expenses, advertising expenses, materials, labor).

  • Liability accounts show what the business owes to creditors (accounts payable, salaries and wages, income taxes).

  • Equity accounts refer to the owner’s equity in their company (initial investments or stock holdings).

  • Revenue/income accounts reflect the income your business generates.

The world of accounting has two main systems: single-entry and double-entry accounting. Single-entry records only revenues and expenses, while double-entry covers assets, liabilities and equity by recording each transaction twice — once as a debit and once as a credit.

Most businesses follow the double-entry system, in which every financial transaction affects at least two accounts. Money coming into one must come out of another. When these two entries balance and result in a total of zero on your balance sheet, your books are considered balanced. This satisfies one of the golden rules of accounting:

Assets (what you own) - Liabilities (what you owe) = Equity (what’s left for you)

In simpler terms, every item your business owns (inventory, equipment, even loans) can be classified as either something you owe (liabilities) or something that belongs to you (equity). Think of it like this: If you borrow $100, that $100 is both an asset (cash) and a liability (loan). When you spend $200 on new equipment, that $200 becomes an asset (the equipment) as well as your equity (money you’ll eventually get back). That’s the fundamental concept behind credits and debits.

For every debit in one account, another account must have a corresponding credit of equal value to offset it.

Whether a debit or credit means an increase or decrease in an account depends on the account type. In traditional double-entry accounting, debits are entered on the left, and credits are entered on the right, like so:

  • Asset accounts Debit Increase, Credit Decrease

  • Expense accounts Debit Increase, Credit Decrease

  • Liability accounts Debit Decrease, Credit Increase

  • Equity accounts Debit Decrease, Credit Increase

  • Revenue/Income accounts Debit Decrease, Credit Increase

Putting it into practice

Now we’ll take a look at how you can apply debits and credits to a few common business scenarios.

Purchasing equipment

Say you own a bakery and decide to buy a new oven for $2,000. You decrease, or debit, your cash balance by $2,000 to pay for the oven, but you increase, or credit, the value of your assets by $2,000. Here’s how this purchase affects your balance sheet:


  • Assets: Equipment Debit: $2,000

  • Assets: Cash Credit: $2,000

Loan for business expansion

To expand your bakery, you take out a $10,000 loan from a bank. You increase (debit) your cash balance by $10,000 because you received the loan, and you record a liability (credit) for the $10,000 loan amount, which you’re obligated to repay. You record each transaction like so:

  • Assets: Cash Debit: $10,000

  • Liability: Loans payable Credit: $10,000

Employee salaries

It’s payday, and you need to pay your employees $2,500 in salaries. You increase (credit) your expenses by $2,500, reducing your equity. You decrease (debit) your cash balance by $2,500 to pay your employees. Your balance sheet reads:

  • Assets: Cash Debit: $2,500

  • Equity: Salaries expense Credit: $2,500

Remembering the fundamentals

The next time you approach your balance sheet, it’s important to remember that debits and credits are the invisible hands keeping everything in balance. By understanding their roles, you can confidently manage your money to make strategic decisions that set your business on the path to lasting success.

For the support you need to stay on top of your finances, be sure to speak with a Chase business banker today.

Accounting 101: Debits and credits explained (2024)


Accounting 101: Debits and credits explained? ›

The individual entries on a balance sheet are referred to as debits and credits. Debits (often represented as DR) record incoming money, while credits (CR) record outgoing money. How these show up on your balance sheet depends on the type of account they correspond to.

How to understand accounting debits and credits? ›

Debits increase the value of asset, expense and loss accounts. Credits increase the value of liability, equity, revenue and gain accounts. Debit and credit balances are used to prepare a company's income statement, balance sheet and other financial documents.

What is the easiest way to remember debits and credits? ›

The easiest way to remember the meaning of debit and credit in accounting is as follows: – Assets increase on the debit side and decrease on the credit side. – Liabilities increase on the credit side and decrease on the debit side.

What is the rule of debits and credits in accounting? ›

The following are the rules of debit and credit which guide the system of accounts, they are known as the Golden Rules of accountancy: First: Debit what comes in, Credit what goes out. Second: Debit all expenses and losses, Credit all incomes and gains. Third: Debit the receiver, Credit the giver.

Is debit money in or out? ›

When your bank account is debited, money is taken out of the account. The opposite of a debit is a credit, in which case money is added to your account.

Is a debit a gain or loss? ›

A debit is an accounting entry that creates a decrease in liabilities or an increase in assets. In double-entry bookkeeping, all debits are made on the left side of the ledger and must be offset with corresponding credits on the right side of the ledger.

Is cash a debit or credit? ›

The cash account is debited because cash is deposited in the company's bank account. Cash is an asset account on the balance sheet.

What are the three golden rules of debit and credit? ›

Before we analyse further, we should know the three renowned brilliant principles of bookkeeping: Firstly: Debit what comes in and credit what goes out. Secondly: Debit all expenses and credit all incomes and gains. Thirdly: Debit the Receiver, Credit the giver.

What is the basic formula for debit and credit? ›

The extended accounting equation is as follows: Assets + Expenses = Equity/Capital + Liabilities + Income, A + Ex = E + L + I. In this form, increases to the amount of accounts on the left-hand side of the equation are recorded as debits, and decreases as credits.

What is the acronym to remember debits and credits? ›

DC ADE LER might sound like some gibberish, but it's actually a helpful acronym to help categorize transactions from a financial standpoint. Debits and credits represent the duality of all financial transactions.

Is a bank withdrawal a debit or credit? ›

A bank debit occurs when a bank customer uses the funds in their account, therefore reducing their account balance. Bank debits can be the result of check payments, honored drafts, the withdrawal of funds from an account at a bank branch or via ATM, or the use of a debit card for merchant payments.

Is rent expense a debit or credit? ›

For example, when a company makes a sale, it credits the Sales Revenue account. Expenses, including rent expense, cost of goods sold (COGS), and other operational costs, increase with debits. When a company pays rent, it debits the Rent Expense account, reflecting an increase in expenses.

Is utilities expense a debit or credit? ›

Payment of expenses – When a business pays for expenses, such as rent or utilities, it is recorded as a debit to the expense account and a credit to the cash account. This means that the business has decreased its assets and its expenses.

What are debits and credits for dummies? ›

By long-standing convention, debits are shown on the left and credits on the right. An increase in a liability, owners' equity, revenue, and income account is recorded as a credit, so the increase side is on the right. The recording of all transactions follows these rules for debits and credits.

Do assets increase by debit or credit? ›

+ + Rules of Debits and Credits: Assets are increased by debits and decreased by credits. Liabilities are increased by credits and decreased by debits. Equity accounts are increased by credits and decreased by debits.

Is salaries expense a debit or credit? ›

Debit all expenses and losses and credit all incomes and gains. So the normal balance of any expense that a company makes is a debit balance. Hence it can be said that the normal balance of the salaries and wages expenses is a debit balance.

How do you solve debit and credit in accounting? ›

Balancing a general ledger involves subtracting the total debits from the total credits. All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side. For a general ledger to be balanced, credits and debits must be equal.

How to remember the difference between debit and credit? ›

Most people will use a list of accounts so they know how to record debits and credits properly. And if that's too much to remember, just remember the words of accountant Charles E. Sprague: “Debit all that comes in and credit all that goes out.”

What is debit and credit in simple words? ›

The terms debit (DR) and credit (CR) have Latin roots. Debit comes from the word debitum and it means, "what is due." Credit comes from creditum, meaning "something entrusted to another or a loan." An increase in liabilities or shareholders' equity is a credit to the account. It's notated as "CR."

How do you read credit terms in accounting? ›

Credit terms are terms that indicate when payment is due for sales that are made on credit, possible discounts, and any applicable interest or late payment fees. For example, the credit terms for credit sales may be 2/10, net 30. This means that the amount is due in 30 days (net 30).


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