What Are Credits and Debits in Accounting?

In accounting, credits and debits are fundamental building blocks for recording financial transactions. They indicate the direction of value movement, not inherently “good” or “bad” signs. Their consistent application forms the basis of the double-entry accounting system, which underpins all financial reporting.

Understanding Credits and Debits

A “debit” represents an entry on the left side of an accounting account, while a “credit” signifies an entry on the right side. These terms record changes in financial accounts, detailing the flow of value into and out of a business.

How Credits and Debits Affect Account Types

The way debits and credits impact an account depends entirely on the type of account involved. Financial accounts are broadly categorized into five main types: Assets, Liabilities, Equity, Revenue, and Expenses. These categories are interconnected through the fundamental accounting equation, which states that a company’s assets must always equal the sum of its liabilities and equity.

Assets represent what a business owns, such as cash, equipment, or accounts receivable. For asset accounts, a debit increases the balance, while a credit decreases it. This means if a business receives cash, the cash account (an asset) would be debited. Liabilities are what a business owes to others, including loans or accounts payable. Conversely, for liability accounts, a credit increases the balance, and a debit decreases it.

Equity represents the owner’s claim on the company’s assets after liabilities are subtracted. Similar to liabilities, equity accounts increase with a credit and decrease with a debit. Revenue accounts, which represent income earned from business operations like sales, also increase with a credit and decrease with a debit. Finally, expenses are the costs incurred in generating revenue, such as rent or salaries. For expense accounts, a debit increases the balance, and a credit decreases it.

The Double-Entry System in Practice

The double-entry bookkeeping system mandates that every financial transaction affects at least two accounts, with one account receiving a debit entry and another receiving a credit entry. This interconnected recording ensures that the fundamental accounting equation remains balanced after each transaction.

For example, when a business purchases office supplies using cash, two accounts are affected: Office Supplies (an asset) and Cash (also an asset). The Office Supplies account would be debited to show an increase in supplies, while the Cash account would be credited to reflect a decrease in cash. If a business provides a service to a customer on credit, the Accounts Receivable account (an asset) would be debited to increase the amount owed. Simultaneously, the Service Revenue account (a revenue account) would be credited to recognize the income earned.