In plain English
Debits increase assets and expenses and decrease liabilities, equity and income. Credits do the opposite.
You do not have to think in debits and credits to use modern software, but the system works this way underneath.
Why it matters
You can run modern software without thinking about debits and credits, but they explain why reports look the way they do. When a balance shows up as negative, or an account sits on the wrong side, understanding the direction of an entry is what lets you fix it instead of guessing.
They also matter when you need a journal entry, such as recording depreciation, an accrual or an owner contribution. A reversed debit and credit doubles the error rather than fixing it, and it can throw off both the profit and loss and the balance sheet.
Worked example
Paying a $120 phone bill: debit telephone expense $120, credit checking $120.
How to handle it
- Before writing an entry, name the two or more accounts affected and whether each goes up or down.
- Apply the rule: debits raise assets and expenses, credits raise liabilities, equity and income.
- Check that total debits equal total credits before saving.
- After posting, open each account and confirm the balance moved in the direction you expected.
- When unsure, look up a similar transaction your software already recorded and see which side it used.
Common mistakes
- Assuming credit means good and debit means bad, as with a bank statement, which leads to entries posted to the wrong side.
- Reversing an entry by posting it again with the same sides, which doubles the original amount instead of cancelling it.
- Reading a bank statement credit as a credit to cash in the books, when it is actually a debit to your cash account.
- Ignoring negative balances in accounts that should not have them, which often point to entries on the wrong side.
Not the same as: Double-entry bookkeeping
Debits and credits are the two sides of each entry. Double entry bookkeeping is the overall system that requires those two sides to be equal. See Double-entry bookkeeping.
Go deeper
- Double-Entry Bookkeeping Explained Simply: Learn how double-entry bookkeeping works, why every transaction touches two accounts, and how it catches errors a simple checkbook register would miss.
- How to Write a Journal Entry Step by Step: Step-by-step guide to writing a manual journal entry: when to use one, how to choose accounts, write memos, and avoid common posting errors.
Related terms
- Deferred revenue: Money received before you have earned it, recorded as a liability until you deliver.
- Depreciation: Spreading the cost of a long-lived asset over its useful life as an expense.
- Cutoff: The date used to decide which period a transaction belongs to.
Common questions
What is a debit and credit?
The left and right sides of an accounting entry. Every entry has equal debits and credits.
Can you give an example of debit and credit?
Paying a $120 phone bill: debit telephone expense $120, credit checking $120.
Why does my bank call a deposit a credit?
From the bank's view, your balance is money it owes you, a liability, so a deposit increases it with a credit. In your own books, that same deposit is a debit to cash.
Do I need to learn debits and credits to do my own books?
Not for routine work in most software. It helps a lot when you review reports, fix errors or write journal entries.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.