What Are Debits and Credits in Accounting?

Accounting helps businesses track financial activities and understand their economic health. Debits and credits are the core language for recording every financial transaction. Understanding these concepts is important for comprehending how financial information is organized and reported, as they categorize and process the flow of value within a business.

Understanding Debits and Credits

In accounting, debits and credits indicate the side of an account where an entry is made. A debit (Dr.) refers to an entry on the left side, while a credit (Cr.) refers to an entry on the right side. These terms do not inherently mean an increase or a decrease; their effect on an account’s balance depends on the account type.

This distinction often confuses those new to accounting, as the common usage of “debit” and “credit” in banking differs from their meaning in bookkeeping. In financial record-keeping, they are directional indicators used to maintain the accuracy and balance of financial records.

How Debits and Credits Affect Different Accounts

The impact of debits and credits varies across the five types of accounting accounts: Assets, Liabilities, Equity, Revenue, and Expenses. Knowing how each type of account reacts to a debit or credit entry is important for accurate financial recording.

Assets

Assets represent what a company owns, such as cash or equipment. An increase in an asset account is recorded with a debit, while a decrease is recorded with a credit. For example, when a business receives cash, the Cash account is debited.

Liabilities

Liabilities represent what a company owes to others, such as loans. For liability accounts, credits increase their balance, and debits decrease them.

Equity

Equity represents the owner’s or shareholders’ stake in the business, the residual value after liabilities are subtracted from assets. An increase in equity is recorded with a credit, and a decrease with a debit.

Revenue

Revenue accounts track income generated from business activities, such as sales. These accounts increase with a credit and decrease with a debit.

Expenses

Expense accounts represent costs incurred to generate revenue, such as rent or salaries. Expenses increase with a debit and decrease with a credit. A mnemonic to remember these rules is “DEAD CLER”: Debits increase Expenses, Assets, and Dividends, while Credits increase Liabilities, Equity, and Revenue.

The Double-Entry Accounting System

Debits and credits are central to the double-entry accounting system. This system dictates that every financial transaction must affect at least two accounts. For every debit entry, there must be an equal and corresponding credit entry. This ensures total debits always equal total credits for every transaction, maintaining balance in the financial books.

This principle ties to the accounting equation: Assets = Liabilities + Equity. The double-entry system ensures this equation remains balanced after every transaction. If total debits do not match total credits, it signals an error in recording the transaction, which helps detect and correct mistakes. This systematic approach provides a clear view of a company’s financial position and enhances the accuracy of financial statements.

Putting It All Together with Examples

Applying the rules of debits and credits becomes clearer through practical examples.

Purchasing Supplies

When a business purchases office supplies for $500 cash, two asset accounts are affected: Supplies and Cash. The Supplies account is debited by $500 to show the increase. The Cash account is credited by $500 to reflect the decrease. This transaction maintains balance, as one asset increases while another decreases by the same amount.

Providing Services on Credit

If a business provides services to a client on credit for $1,000, Accounts Receivable (an asset) increases and is debited by $1,000. Service Revenue (a revenue account) also increases and is credited by $1,000. This illustrates how a debit to an asset is balanced by a credit to a revenue account, reflecting earned income.

Paying Rent

If a business pays monthly rent of $800, the Rent Expense account increases, requiring an $800 debit. The Cash account, an asset, decreases, necessitating an $800 credit. Here, an increase in an expense is offset by a decrease in an asset. These examples demonstrate how debits and credits systematically capture the dual effect of every financial event, ensuring the accounting equation remains balanced.