Debit and credit are just left and right
In accounting, debit means the left side of an account and credit means the right side. They do not mean "good" or "bad", or "increase" or "decrease". Whether a debit increases an account depends on the account type.
| Account type | Increases with | Normal balance |
|---|---|---|
| Assets | Debit | Debit |
| Expenses | Debit | Debit |
| Owner withdrawals / dividends | Debit | Debit |
| Liabilities | Credit | Credit |
| Equity (capital) | Credit | Credit |
| Revenue | Credit | Credit |
A memory aid: the equation Assets = Liabilities + Equity has assets on the left, so assets grow with debits, and liabilities and equity (right side) grow with credits. Expenses reduce equity, so they behave opposite to equity: they grow with debits.
The accounting cycle in short
- Analyse a transaction.
- Record a journal entry (the date, the accounts, equal debits and credits).
- Post to the ledger accounts.
- Prepare a trial balance.
In every entry, total debits must equal total credits.
Worked example
Record these January transactions for a consulting firm.
| Date | Event | Entry |
|---|---|---|
| Jan 2 | Owner invests $10,000 | Dr Cash 10,000 / Cr Owner's Capital 10,000 |
| Jan 5 | Buys equipment $4,000 on credit | Dr Equipment 4,000 / Cr Accounts Payable 4,000 |
| Jan 10 | Bills a client $2,500 for work done | Dr Accounts Receivable 2,500 / Cr Service Revenue 2,500 |
| Jan 20 | Pays January rent $1,200 | Dr Rent Expense 1,200 / Cr Cash 1,200 |
| Jan 25 | Client pays $2,500 owed | Dr Cash 2,500 / Cr Accounts Receivable 2,500 |
| Jan 28 | Pays $1,000 of the equipment bill | Dr Accounts Payable 1,000 / Cr Cash 1,000 |
Account balances. Cash: 10,000 − 1,200 + 2,500 − 1,000 = 10,300 (debit). Equipment: 4,000 (debit). Accounts payable: 4,000 − 1,000 = 3,000 (credit). Capital: 10,000 (credit). Revenue: 2,500 (credit). Rent expense: 1,200 (debit). Receivable: 0.
Trial balance totals: debits = 10,300 + 4,000 + 1,200 = 15,500. Credits = 3,000 + 10,000 + 2,500 = 15,500. They agree. ✓
What a trial balance proves
If debits equal credits, the books are mathematically in balance. It does not prove every entry was right. A transaction posted to the wrong account, or recorded twice, still balances.
Compound entries
An entry with more than two lines, such as buying a $9,000 machine with $3,000 cash and a $6,000 loan, is a compound entry. Debits (9,000) still equal credits (3,000 + 6,000).
Common mistakes
- Thinking a debit always increases an account.
- Recording only half of a transaction.
- Using the account type from memory instead of reasoning from the equation.