What is Debits and Credits?
Debits and credits are the two sides of every bookkeeping entry; each account type increases on one side and decreases on the other.
In double-entry bookkeeping, every transaction is recorded as debits on one side and credits on the other, with equal totals. "Debit" simply means the left side of an entry and "credit" the right side; neither means good or bad.
How each account type behaves
| Account type | Increases with | Decreases with |
|---|---|---|
| Assets | Debit | Credit |
| Expenses | Debit | Credit |
| Liabilities | Credit | Debit |
| Equity | Credit | Debit |
| Revenue | Credit | Debit |
Examples
- Receiving $1,000 from a customer for an invoice: debit cash $1,000; credit accounts receivable $1,000
- Paying a $300 utility bill: debit utilities expense $300; credit cash $300
- Owner contributing $5,000: debit cash $5,000; credit owner contributions $5,000
Why your bank statement looks "backwards"
Your bank records your deposit as a credit because, from the bank's perspective, it owes you that money: your account is a liability on its books. In your books, the same deposit is a debit to cash.
Do you need to know this?
Software creates most debits and credits automatically. Understanding them helps when reading a general ledger, reviewing a journal entry or checking a trial balance. Our bookkeeping services handle the entries; the IRS's Publication 583 describes recordkeeping systems in general terms.
Related terms
- Accounts Receivable: Accounts receivable is money customers owe your business for goods or services already delivered.
- Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
- Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
- General Ledger: The general ledger is the complete record of every transaction posted to every account in a business's books.
Browse more definitions in the small business glossary.
FAQs
Frequently asked questions
Is a debit always money coming in?
No. A debit increases asset and expense accounts and decreases liability, equity and revenue accounts. Whether it involves cash depends on the accounts in the entry.
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