Debits vs Credits in Accounting

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Post Written by: Integra Credit | February 16 2024

If you've read the most basic accounting book, you've likely heard of debits and credits. While the terms may be familiar, they take on an entirely new meeting in accounting. For example, when you slide your bank debit card, you remove money from your account. In this instance, debits decrease your asset account balance. On the other hand, if the bank makes an error or decides to reverse fees charged to your account, they will issue you a credit. In personal finance, a credit would increase the balance in your asset account. However, it's almost the exact opposite when it comes to accounting. Let's take a closer look at the debit vs credit in accounting.

Key Takeaways

Debits and credits underpin the double-entry bookkeeping system where every transaction is recorded in one or more accounts.
Asset, loss, and expense accounts are increased by debits and decreased by credits in accounting terms.
Liability, equity, revenue, and gains accounts are increased by credits and decreased by debits.

What Are Debits vs Credits?

Credits and debits underpin the staple double-entry accounting bookkeeping system. In double-entry accounting, every transaction impacts two or more general ledger accounts. Two broad general ledger categories are:

Assets
Liabilities

Debits and credits are the yin and yang of accounting: you can't have one without the other. Debits represent money moving into your account, while credits represent money flowing out. Debits and credits are interconnected and keep your business's books balanced.

Debits (+) are transactions that increase asset, loss, and expense accounts. Debits decrease the balance of liability, gains, equity, and revenue accounts.
Debits are recorded on the left side of the accounting journal entry
Credits (-) are transactions that increase the balance of a liability, revenue, equity, and gains account. Debits decrease these accounts.
Credits are recorded on the right side of the accounting journal entry.

How Are Debits and Credits Used?

As the backbone of any accounting system, debits and credit represent value flowing in and out of a business. Debits and credits help categorize a company's financial activities in the general ledger. As previously mentioned, debits and credits are equal and opposite. Regardless of how many line items or accounts are involved, the total value of debits must equal the total value of credits. However, debits and credits impact different accounts differently.

Every business transaction, such as payroll, taking a loan, purchasing new computers, etc., is documented in a company's general ledger with debits and credits. The transaction appears as a line item with an appropriate debit and credit, which changes the value of the account. Most companies' general ledger includes at least seven different account types on financial statements. These account types and the impact of debits and credits are explained below.

Debits and Credits in Asset Accounts

Whether it's inventory, accounts receivables, or cash, asset accounts reflect resources currently owned or will be owned by the company.

Debits increase asset accounts
Credits decrease asset accounts

Debits and Credits in Expense Accounts

Expense accounts reflect the costs a business incurs for generating revenue and conducting business, such as advertising costs, rent, travel expenses, employee salaries, etc.

Debits increase expense accounts
Credits decrease expense accounts

Impact of Debits and Credits on Liability Accounts

Liability accounts reflect money owed by the company, such as loans, taxes, credit card accounts, etc.

Debits decrease liability accounts
Credits increase liability accounts

Debits and Credits in Equity Accounts

Equity accounts are the interest shareholders have in the organization's assets, such as stocks, dividends, etc.

Debits decrease equity accounts
Credits increase equity accounts

Debits and Credits in Revenue Accounts

Revenue accounts represent the money coming into the business from operating and nonoperating activities, such as sales, consulting services, investment income, etc.

Debits decrease revenue accounts
Credits increase revenue accounts

Debits and Credits in Gain Accounts

Gain accounts represent valuation increases associated with activities not related to the core business, such as the increase in value from the sale of an asset, proceeds from a lawsuit, etc.

Debits decrease gain accounts
Credits increase gain accounts

Debits and Credits in Loss Accounts

The opposite of a gain account is a loss account. This account represents decreases in value associated with non-primary business activities, such as loss in value from the sale of an asset or settlement payments from the loss of a lawsuit.

Debits increase loss accounts.
Credits decrease loss accounts.

Debit and Credit Examples

The "T chart" or "T account" is a chart with two columns that demonstrate general ledger activity. The chart looks similar to the shape of a "T". Debits are housed on the left side of the "T", and the right side is reserved for credits. The name of the account will be at the top. For instance, if a company purchases $25,000 worth of electronics with cash for the office, it would translate into:

A $25,000 debit (+) in the Office Equipment account, and
A $25,000 credit (-) in Cash account.

Debit vs Credit Accounting

The most basic accounting principles to understand are debits and credits. In double-entry accounting, debits always refer to incoming money, while credits refer to funds flowing out. Because of this, debit transactions increase expense and asset accounts, while credit accounts increase equity and liability accounts. The use of debits and credits in accounting is counter-intuitive to how they are used in personal finance. In personal finance, a debit transaction generally removes money, while credits increase or add money.

Applying Debits and Credits in Personal Finance

While debits and credits are typically used for businesses, this approach can also be used in personal finances. However, most people don't view themselves or their finances in a business sense, which centers around beating the competition and turning a profit. Occasionally, it can be beneficial to view your financial situation in this manner to help you cut expenses and boost cash flow. Instead of accounts, you can think of your different spending categories as buckets.

The cash bucket may represent the disposable cash.
The credit card bucket represents the revolving balance on your cards before interest is applied.
The car loan bucket represents how much you've paid toward your car note.

If you make your car loan monthly payment of $400, you will debit (increase) the car loan bucket and credit (reduce) your cash bucket, lowering the amount of money you have available. But it will also show an increase in how much you've paid toward your car loan, which will decrease the total amount you owe.

Debits and Credits FAQs

How Do Debits and Credits Impact Liability Accounts?

Debits decrease liability accounts, and credits increase liability accounts.

Which Side of the T-Chart Are Debits vs Credits?

Debits are always on the left side of the entry, while credits are on the right. Debits and credits should always be equal.

Bottom Line

While budgeting isn't always easy or fun — it's vital to developing healthy financial habits. That's where using the debit and credit accounting system can be helpful. When you use this system, you'll keep a detailed record of your cash flow. In addition to helping you stay organized, it can offer valuable perspective into your financial health and spending habits.