Debits VS Credits: A Simple, Visual Guide (2024)

What exactly does it mean to “debit” and “credit” an account? Why is it that debiting some accounts makes them go up, but debiting other accounts makes them go down? And why is any of this important for your business?

Here’s everything you need to know.

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What is a debit?

In double-entry accounting, debits (dr) record all of the money flowing into an account. So, if your business were to take out a $5,000 small business loan, the cash you receive from that loan would be recorded as a debit in your cash, or assets, account.

What is a credit?

Credits (cr) record money that flows out of an account. To use that same example from above, if you received that $5,000 loan, you would record a credit of $5,000 in your liabilities account.

What types of entry methods are there for recording transactions?

There are two methods of recording transactions in accounting: single-entry and double-entry.

Because single-entry bookkeeping is a cash system, which simply records incoming and outgoing cash in a single ledger, it’s not used very often by professional accountants or bookkeepers.

Most accountants, bookkeepers, and accounting software platforms use the double-entry method for their accounting. Under this system, your entire business is organized into individual accounts. Think of these as individual buckets full of money representing each aspect of your company.

For example:

  • One bucket might represent all of the cash you have in your business bank account (the “cash” bucket)
  • Another bucket might represent the total value of all the furniture your business has in its office (the “furniture” bucket)
  • Another bucket might represent a bank loan you recently took out (the “bank loan” bucket)

Debits VS Credits: A Simple, Visual Guide (1)

When your business does anything—buy furniture, take out a loan, spend money on research and development—the amount of money in the buckets changes.

Recording what happens to each of these buckets using full English sentences would be tedious, so we need a shorthand. That’s where debits and credits come in.

When money flows into a bucket, we record that as a debit (sometimes accountants will abbreviate this to just “dr.”)

For example, if you deposited $300 in cash into your business bank account:

Debits VS Credits: A Simple, Visual Guide (2)

An accountant would say we are “debiting” the cash bucket by $300, and would enter the following line into your accounting system.

When money flows out of a bucket, we record that as a credit (sometimes accountants will abbreviate this to just “cr.”)

For example, if you withdrew $600 in cash from your business bank account:

Debits VS Credits: A Simple, Visual Guide (3)

An accountant would say you are “crediting” the cash bucket by $600.

Debits and credits in action

There’s one thing missing from the examples above. Money doesn’t just disappear or appear out of nowhere. It has to come from somewhere, and go somewhere.

That’s what credits and debits let you see: where your money is going, and where it’s coming from.

Let’s say that one day, you visit your friend’s startup. After taking a tour of the office, your friend shows you a beautiful ergonomic standing desk. You’ve been looking for this model for months, but all the furniture stores are sold out. Your friend ordered an extra one, and she can sell it to you for cheap. You agree to buy it from her for $600.

Here’s what that would look like using our bucket system. First, we move $600 out of your cash bucket.

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Just like in the above section, we credit your cash account, because money is flowing out of it.

But this isn’t the only bucket that changes. Your “furniture” bucket, which represents the total value of all the furniture your company owns, also changes.

In this case, it increases by $600 (the value of the chair).

Debits VS Credits: A Simple, Visual Guide (5)

You debit your furniture account, because value is flowing into it (a desk).

In double-entry accounting, every debit (inflow) always has a corresponding credit (outflow). So we record them together in one entry.

An accountant would say that we are crediting the bank account $600 and debiting the furniture account $600.

How debits and credits affect liability accounts

The two buckets we used in the above example—cash and furniture—are both asset buckets. (That is, they keep track of something you own.)

But not all buckets are asset buckets. Some buckets keep track of what you owe (liabilities), and other buckets keep track of the total value of your business (equity).

Let’s imagine that after buying that expensive desk, you want to get some extra cash for your business. So you take out a $1,000 bank loan, and you increase (debit) your cash account by $1,000.

Debits VS Credits: A Simple, Visual Guide (6)

Now here’s the tricky part.

In addition to adding $1,000 to your cash bucket, we would also have to increase your “bank loan” bucket by $1,000.

Debits VS Credits: A Simple, Visual Guide (7)

Why? Because your “bank loan bucket” measures not how much you have, but how much you owe. The more you owe, the larger the value in the bank loan bucket is going to be.

In this case, we’re crediting a bucket, but the value of the bucket is increasing. That’s because the bucket keeps track of a debt, and the debt is going up in this case.

How debits and credits affect equity accounts

Let’s do one more example, this time involving an equity account.

Let’s say your mom invests $1,000 of her own cash into your company. Using our bucket system, your transaction would look like the following.

First, your cash account would go up by $1,000, because you now have $1,000 more from mom.

Debits VS Credits: A Simple, Visual Guide (8)

But that’s not the only bucket that changes. You mom now has a $1,000 equity stake in your business—so the bucket labelled “equity (Mom)” also increases by $1,000:

Debits VS Credits: A Simple, Visual Guide (9)

Why is it that crediting an equity account makes it go up, rather than down? That’s because equity accounts don’t measure how much your business has. Rather, they measure all of the claims that investors have against your business.

The Equity (Mom) bucket keeps track of your Mom’s claims against your business. That’s her equity, not your business’s. In this case, those claims have increased, which means the number inside the bucket increases.

Debits and credits chart

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.”

Debits VS Credits: A Simple, Visual Guide (2024)

FAQs

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

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

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."

What is the easiest way to remember the rules of debit and credit? ›

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. – Equity increases on the credit side and decreases on the debit side.

How do you 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 are three golden rules? ›

1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.

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 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.

What is the golden rule of debit? ›

Therefore, applying the golden rules, you have to debit what comes in and credit the giver. Rent is considered as an expense and thus falls under the nominal account. Additionally, cash falls under the real account. So, according to the golden rules, you have to credit what goes out and debit all losses and expenses.

Are debits and credits confusing? ›

The words debit and credit can sometimes be confusing because they depend on the point of view from which a transaction is observed. In accounting terms, assets are recorded on the left side (debit) of asset accounts, because they are typically shown on the left side of the accounting equation (A=L+SE).

What is a debit and credit in accounting for dummies? ›

Debits are recorded on the left side of an accounting journal entry. A credit increases the balance of a liability, equity, gain or revenue account and decreases the balance of an asset, loss or expense account. Credits are recorded on the right side of a journal entry. Increase asset, expense and loss accounts.

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

Debits increase asset or expense accounts and decrease liability or equity. Credits do the opposite — decrease assets and expenses and increase liability and equity. To make sense of this, take a look at the basic accounting equation, which is Assets = Equity + Liabilities.

Are expenses debit or credit? ›

Assets and expenses have natural debit balances. This means that positive values for assets and expenses are debited and negative balances are credited. For example, upon the receipt of $1,000 cash, a journal entry would include a debit of $1,000 to the cash account in the balance sheet, because cash is increasing.

Is retained earnings a debit or credit? ›

Q: Is Retained Earnings a debit or credit? A: Retained Earnings is a credit balance account. It increases with a credit entry when the company earns profits and decreases with a debit entry when the company distributes dividends or incurs losses.

What is the acronym for debits vs credits? ›

The mnemonic acronym DEALER can help remember these rules: Debit: Dividends, Expenses, and Assets. Credit: Liabilities, Equity, and Revenue.

What is an example of a debit and credit in accounting? ›

Say you purchase $1,000 in inventory from a vendor with cash. To record the transaction, debit your Inventory account and credit your Cash account. Because they are both asset accounts, your Inventory account increases with the debit while your Cash account decreases with a credit.

How do you understand debits and credits and T accounts? ›

T- Account Recording

The debit entry of an asset account translates to an increase to the account, while the right side of the asset T-account represents a decrease to the account. This means that a business that receives cash, for example, will debit the asset account, but will credit the account if it pays out cash.

Is debit money in or out? ›

A debit to your bank account occurs when you use funds from the account to buy something or pay someone. 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.

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