Debits and credits explained

What debits and credits are

Debits and credits are the two sides of every bookkeeping entry: a debit is an amount recorded on the left side of an account and a credit is an amount recorded on the right. They matter because double-entry bookkeeping requires every transaction to have equal debits and credits, which keeps the accounting equation in balance and exposes many errors automatically.

The words come from Latin (debere, to owe, and credere, to trust), but today they carry no meaning of good or bad. A debit is not a loss and a credit is not a gain. Each is simply a side. Whether that side increases or decreases an account depends on the type of account, and learning that rule is the whole skill.

Why every transaction needs two sides

Every business transaction has two effects. Buying a printer for cash gives the business a printer and takes away cash. Borrowing from a bank brings in cash and creates a debt. Double-entry bookkeeping records both effects, one as a debit and one as a credit, for the same total. The method was set out in print by the Italian mathematician Luca Pacioli in 1494 and has not changed in principle since.

The payoff is a built-in check. Because every entry has equal debits and credits, the sum of all debit balances in the ledger must equal the sum of all credit balances. That list of balances is called a trial balance. If it does not balance, something was posted to one side only or with the wrong amount. Our guide on the general ledger explains how the ledger behind that list is organised. It also means the accounting equation, assets equal liabilities plus equity, holds after every single entry, not just at year end.

The debit and credit rules for each account type

The rules follow from the accounting equation. Assets sit on the left of the equation, so they increase on the left (debit). Liabilities and equity sit on the right, so they increase on the right (credit). Income increases equity, so it increases with a credit. Expenses reduce equity, so they increase with a debit. Drawings and dividends also reduce equity, so they are debits.

The normal balance of an account is the side on which it increases, and therefore the side on which its balance usually sits. An account showing the opposite balance is not automatically wrong, but it always deserves a look.

• Assets: debit to increase, credit to decrease. Normal balance: debit.
• Expenses: debit to increase, credit to decrease. Normal balance: debit.
• Drawings or dividends: debit to increase, credit to decrease. Normal balance: debit.
• Liabilities: credit to increase, debit to decrease. Normal balance: credit.
• Equity (capital, share capital, retained earnings): credit to increase, debit to decrease. Normal balance: credit.
• Income or revenue: credit to increase, debit to decrease. Normal balance: credit.
• Contra accounts reverse the rule of the account they reduce: accumulated depreciation and the allowance for doubtful debts carry credit balances against assets; sales returns carry a debit balance against revenue. Our guide on depreciation shows accumulated depreciation at work.

A memory aid that works: DEAD CLIC

Students in many countries use the phrase DEAD CLIC. The first word lists what increases with a debit: Debits increase Expenses, Assets and Drawings. The second word lists what increases with a credit: Credits increase Liabilities, Income and Capital. Once you know which side increases an account, the other side decreases it.

A second habit helps even more: always start with the cash or bank account, because it is the one you understand intuitively. Money coming in is a debit to bank; money going out is a credit to bank. Once you know one side of the entry, the other side is whatever explains why the money moved. Cash paid for rent: credit bank, so debit rent expense. Cash received from a customer who owed you: debit bank, so credit trade receivables.

Why your bank statement seems to say the opposite

Beginners are often confused because a bank statement calls a deposit a credit. The statement is written from the bank's point of view. Your money in the bank is a liability for the bank, since it owes that money back to you. When you deposit funds the bank's liability to you increases, so the bank credits your account.

In your own books the same money is an asset, so the deposit is a debit to your bank account. Both records are correct; they are simply two businesses looking at one balance from opposite sides. The same logic explains why a supplier's statement shows your purchases as debits: for the supplier, you are a receivable. Our guide on accounts payable versus accounts receivable looks at both sides of that relationship.

T-accounts: how to draw and balance them

A T-account is a sketch of one ledger account shaped like the letter T: the account name across the top, debits in the left column and credits in the right. Accountants use T-accounts on paper to think through entries, and every ledger report in a computer system is a T-account laid out in rows.

To balance a T-account, add each side, subtract the smaller total from the larger, and the difference is the balance, which sits on the side with the larger total. In a formal ledger the balance is written on the smaller side as balance carried down so both columns show the same total, then brought down on the correct side to start the next period.

Here is the bank T-account for the worked example in the next section. Debit side: capital 15,000, receipt from customer 4,520, cash sale 1,130, total 20,650. Credit side: paper 1,200, supplier payment 3,000, wages 1,500, drawings 700, total 6,400. Balance: 20,650 minus 6,400 equals a debit balance of CAD 14,250, which is exactly what we expect because bank is an asset.

Ten worked postings for a new business

Maple Print Studio is a new print shop in Toronto, run as a sole proprietorship. Harmonized sales tax (HST) in Ontario is 13 percent and is shown on the two sales so you can see a three-line entry. Tax on purchases is left out to keep the other entries to two lines; our guides on journal entries with examples and on VAT accounting entries show how recoverable input tax is recorded. Each line reads debit first, then credit, and each entry balances.

Notice the pattern in entry 10. Paper was recorded as an asset when bought because it had not been used yet. At month end the part consumed becomes an expense. That is an adjusting entry, a topic with its own guide.

• 1. Owner invests CAD 15,000: Dr Bank 15,000 / Cr Owner's capital 15,000.
• 2. Buys a printer on credit for 8,000: Dr Equipment 8,000 / Cr Accounts payable 8,000.
• 3. Buys paper stock for 1,200 cash: Dr Supplies 1,200 / Cr Bank 1,200.
• 4. Invoices a customer 4,000 plus 13 percent HST: Dr Accounts receivable 4,520 / Cr Revenue 4,000 / Cr HST payable 520.
• 5. The customer pays in full: Dr Bank 4,520 / Cr Accounts receivable 4,520. Then 6. pays the printer supplier 3,000 on account: Dr Accounts payable 3,000 / Cr Bank 3,000.
• 7. Pays a part-time assistant 1,500: Dr Wages expense 1,500 / Cr Bank 1,500.
• 8. Owner takes 700 for personal use: Dr Drawings 700 / Cr Bank 700.
• 9. Cash sale of 1,000 plus HST: Dr Bank 1,130 / Cr Revenue 1,000 / Cr HST payable 130. Then 10. paper worth 400 is used up: Dr Supplies expense 400 / Cr Supplies 400.

Proving it: the trial balance and the equation

After the ten postings each account is balanced like the bank T-account above. Debit balances: Bank 14,250, Equipment 8,000, Supplies 800, Wages expense 1,500, Supplies expense 400 and Drawings 700, a total of CAD 25,650. Credit balances: Owner's capital 15,000, Accounts payable 5,000, HST payable 650 and Revenue 5,000, a total of CAD 25,650. The two totals agree, so every entry was posted to both sides with equal amounts.

Profit for the period is revenue 5,000 minus wages 1,500 and supplies used 400, which is 3,100. Now check the equation. Assets are 14,250 plus 8,000 plus 800, a total of 23,050. Liabilities are 5,000 plus 650, a total of 5,650. Equity is capital 15,000 plus profit 3,100 minus drawings 700, a total of 17,400. Liabilities plus equity equal 23,050, the same as assets.

A balanced trial balance proves arithmetic, not correctness. If entry 7 had been posted as a debit to equipment instead of wages, the totals would still agree, but profit would be overstated by 1,500 and the balance sheet would carry a printer that does not exist.

Reading abnormal balances and common mistakes

Knowing normal balances turns the trial balance into a diagnostic tool. A bank account with a credit balance means an overdraft, or a payment posted twice. Accounts payable with a debit balance usually means a supplier was paid twice or an invoice was never entered. Revenue with a debit balance usually means returns, a reversal or an entry posted to the wrong side.

• Reversing the sides of an entry: the trial balance still agrees, but two accounts are each wrong by twice the amount.
• Recording a customer receipt as revenue when the sale was already invoiced, which counts the income twice and leaves the receivable open.
• Debiting an expense for an asset purchase, or the reverse, which misstates both profit and the balance sheet.
• Posting VAT, GST or HST collected to revenue instead of a tax liability account.
• Forgetting contra accounts: writing depreciation directly off the asset loses the original cost information.
• Assuming a balanced trial balance means the books are right. Errors of omission, principle, original entry and reversal all pass the trial balance test, which our guide on finding and correcting accounting errors covers.

Debits and credits in Skyline Nexus ERP

Skyline Nexus ERP applies these rules at the level of the chart of accounts. Every account type carries a classification (asset, liability, equity, revenue or expense) and a normal balance of debit or credit, so reports know which side an account should sit on. A manual entry is made in Fiscal Authority under Journal Entries, New Journal Entry, with separate Debit and Credit columns for each line; the system refuses to save it unless there are at least two lines and total debits equal total credits.

Most entries, however, are never typed. When an administrator switches on automatic posting, a final sale generates its own balanced journal in the background: a debit to accounts receivable (or a cash-sales clearing account for a POS sale paid fully in cash), credits to revenue and to the VAT output account, and a second pair debiting cost of goods sold and crediting inventory. Accounts can also be flagged so they do not accept manual postings at all, which keeps hand-keyed debits and credits away from control accounts. Our guide on how Skyline Nexus ERP works follows one sale from invoice to trial balance.

Where to go from here

Debits and credits are the grammar of accounting; the next guides use that grammar to write longer sentences. Practise by taking any ten transactions from your own life or a small business, writing each as a debit and a credit, drawing the T-accounts and proving the trial balance. When you can do that without looking at the rules, move on.

• Accounting basics for beginners: the equation, the five account types and the core concepts behind these rules.
• Journal entries with examples: 25 entries for one month of a trading business, including VAT, returns, payroll and month-end adjustments.
• The accounting cycle: how journals become ledgers, trial balances, statements and closing entries.
• Adjusting entries explained: why supplies used, depreciation and accruals are posted at period end.
• Trial balance to financial statements: how the balances proved here become a balance sheet and income statement.
• Bank reconciliation step by step: the same debit and credit logic applied to the cash book and the bank statement.