What Are Debits and How Do They Affect Your Accounts?

A debit is an entry made on the left side of an account within the double-entry accounting system. Along with credits, debits are building blocks for comprehensive financial record-keeping. They provide a structured method for tracking the flow of economic value into and out of an organization.

The Double-Entry Accounting System

Debits are an integral part of the double-entry accounting system, a method that requires every financial transaction to affect at least two accounts. This system operates on the principle that for every debit recorded, there must be an equal and opposite credit. This ensures that the fundamental accounting equation—Assets equal Liabilities plus Equity—always remains in balance.

The double-entry system is widely adopted because it provides a comprehensive view of a business’s financial activities. It enhances accuracy and completeness in financial records, making it easier to detect errors.

How Debits Impact Account Types

The effect of a debit depends entirely on the type of account it impacts. Understanding these specific effects is central to grasping how debits function within financial records.

Debits increase asset accounts, such as cash, accounts receivable, or equipment. When a business purchases new machinery, the equipment account is debited, showing an increase in assets. Debits also increase expense accounts like rent expense or salaries expense. For example, if a company pays its utility bill, the utilities expense account is debited.

Conversely, debits decrease liability accounts, such as accounts payable or loans payable. For instance, paying off a loan debits the loans payable account, reducing the amount owed. Debits also decrease equity accounts, including owner’s capital or retained earnings; an owner’s withdrawal of funds for personal use would result in a debit. Finally, debits decrease revenue accounts, such as sales revenue or service revenue, as seen when a customer return of goods leads to a debit to the sales revenue account.

Recording Business Transactions

Recording business transactions accurately involves applying the rules of debits and credits through journal entries. Each journal entry details the accounts affected by a transaction, whether they are debited or credited, and the monetary amount involved. This systematic approach ensures that every financial event is properly documented, adhering to the double-entry principle.

Consider a transaction where a business receives $5,000 in cash for services provided. The Cash account, an asset, increases, so it is debited for $5,000. The Service Revenue account, a revenue account, also increases, and revenue increases are recorded as credits. The journal entry would show a debit to Cash and a credit to Service Revenue, both for $5,000.

If a business pays a monthly rent expense of $1,200 in cash, the Rent Expense account increases, and expenses are increased with debits. The Cash account, an asset, decreases, and asset decreases are recorded as credits. The journal entry would include a debit to Rent Expense for $1,200 and a credit to Cash for $1,200.

When supplies are purchased on credit for $800, the Supplies account, an asset, increases, requiring a debit. The Accounts Payable account, a liability, also increases because the business now owes money, and liabilities increase with credits. The journal entry would reflect a debit to Supplies and a credit to Accounts Payable, both for $800.

Finally, if the business pays off $600 of its accounts payable, the Accounts Payable account, a liability, decreases, which is recorded as a debit. The Cash account, an asset, also decreases as money is paid out, requiring a credit. The journal entry would show a debit to Accounts Payable and a credit to Cash, both for $600.