Debits vs. Credits: What Is the Difference?

Debits and credits are essential for accurate accounting for your small business. However, understanding the difference between debits and credits can be tricky, and it’s not always obvious what’s a debit and what’s a credit.

In this 101 guide, we’ll explain everything that you need to know to get started with tracking debits and credits for your business.

Jump to:

• What is a debit?
• What is a credit?
• What is the difference between a debit and a credit?
• How do debits and credits affect different accounts?
• How are debits and credits used?
• Examples of debits and credits

What is a debit?

A debit entry records incoming money to an account. In other words, debits increase your assets and decrease your liabilities. Debits are records on the left side of an accounting journal entry under the double-entry accounting system. They’re usually recorded as a positive number to indicate that they’re additions to your account.

Debits in accounting should not be confused with a debit card. Debit cards are linked directly to a user’s bank account (specifically a checking account), so they can only spend the money that’s in the account.

What is a credit?

A credit entry records outgoing money to an account. In other words, credits decrease your assets and increase your liabilities. Credits are records on the right side of an accounting journal entry under the double-entry accounting system. They’re usually recorded as a negative number to indicate that they’re deductions from your account.

Credits in accounting should not be confused with a credit card. Credit cards provide users with a line of credit, and they borrow against that line of credit as they make purchases. Credit cards charge interest on the amount borrowed, unless the amount is paid off in full during the grace period.

What is the difference between a debit and a credit?

Debits are incoming money and credits are outgoing money. In accounting and bookkeeping, debits increase assets and decrease liabilities, and credits increase liabilities and decrease assets. Understanding the difference between a debit and a credit is key to accurate accounting for your business, but keeping them straight can be tricky.

Not only does “debit” sound very similar to “debt,” people will sometimes use the terms “debit” and “credit” interchangeably even though they don’t mean the same thing. In everyday conversation, you might hear people say that money has been credited to an account (meaning that a deposit has been made), when they actually mean that the money has been debited to the account.

Fortunately, accounting software automatically categorizes each new transaction as either a debit or a credit, making it super easy to keep track of everything. All you have to do is review each transaction to make sure it’s been properly categorized.

How do debits and credits affect different accounts?

To understand how debits and credits are used, you first need to know the five main types of business accounts:

• Assets: Items that provide future economic benefits for the company, such as accounts receivable, inventory and equipment.
• Liabilities: Obligations that a company is required to pay — examples include accounts payable and loans.
• Equity: Money or property that could be returned to owners or shareholders if all company assets were liquidated and all debts were paid off.
• Revenue: Income earned from the sale of goods or services.
• Expenses: Cost of operations that are incurred to do business — examples include rent and wages.

Debits increase asset and expense accounts and decrease liabilities, equities and revenue accounts. Credits decrease asset and expense accounts and increase liabilities, equities and revenue accounts. This handy chart summarizes how debits and credits affect the various types of accounts:

Again, accounting software makes it easy to organize and track the various types of financial accounts your business needs. To get started, take a look at our complete guide to finding the perfect accounting software for your needs and budget. And for more information about keeping all your financial accounts organized, check out our guide to creating a chart of accounts as well as our guide to Generally Accepted Accounting Principles (GAAP).

How are debits and credits used?

Debits and credits are used to categorize each transaction and to monitor your business’ assets and liabilities over time. In double-entry accounting, all entries must balance each other out. So if you debit one account, then you must credit one or more accounts as well. For example, if you take out a $5,000 loan for your business, you would debit your assets account to represent the new cash. Then you would credit the same amount to your liabilities to represent that debt that you must now pay off. We’ll explore more examples of using debits and credits in the section below.

Examples of debits and credits

Let’s take the example of the business loan above and see how the credit and debits would be logged in your accounting entries. Here’s a simple example of how the debits and credits might be entered:

Now let’s consider a slightly more complicated example. Say your company sells office supplies, and a customer purchases five reams of paper for $30 each. The customer also pays a 10% sales tax on top of the purchase, so the total amount of money that they give you is 5 x $30 + (10% {5 x $30}) = $165. The reams of paper originally cost you $10 each, so your cost of goods sold is $50. Here’s how you would log all this information as credits and debits.

As you can see, the credits and debits balance each other out exactly. Logging debits and credits like this may seem complex, but like we said above, the best accounting apps will do the heavy lifting for you. Accounting software will automate most of the calculations and categorization, making it easy to maintain accurate books and manage your company’s finances.