Debit vs Credit: Understanding accounting examples

Business accounting can be a complicated undertaking, but it’s essential to keep all financial transactions in order. One of the most popular accounting methods many businesses use today is debit vs credit or the debit and credit method, commonly known as double-entry accounting. It’s called double-entry accounting because every time a debit is entered into an account, it also has a corresponding credit entry in another account. This way, the transactions balance each other out.

Understanding debits and credits in accounting is particularly important when it comes to loan liability. Here, we’ll look at debit vs credit accounting with concrete examples to help you visualize how this method affects liability so you can be prepared when you apply for a business loan.

Debit vs Credit Accounting

The most basic accounting principles to understand in terms of debit vs credit is that a debit transaction increases an asset or expense account, such as depositing cash into your business account. A credit transaction, on the other hand, decreases an asset or expense account. Conversely, a debit transaction decreases a liability or equity account, while a credit increases a liability or equity account.

This may seem to oppose the traditional meanings for debit and credit, where a debit generally takes away from, while a credit adds to. With debits and credits in accounting, however, debits represent money coming into an account, while credits represent money going out.

The best way to understand this system is to look at a debit and credit in accounting example that demonstrates the method in action.

Debit vs Credit Examples

Debit vs credit accounting is easier to make sense of when you can view it in a debit and credit example that shows how each entry goes in a separate account. Let’s use the example of a bike shop that sells a bicycle for $1,000 cash. That $1,000 is entered as a debit that increases the cash (asset) account, because it is $1,000 in cash coming into the business. The corresponding credit transaction that will balance out the debit is an entry into the revenue account for $1,000.

In a credit debit chart, debit entries are on the left while credit entries are on the right. So, for example, in a chart showing a company’s assets, all the debit entries showing money flowing into the company’s asset account would be shown on the left, with their corresponding credit entries balancing them out on the right.

How Debit and Credit Affect Loan Liability

Accounting debit and credits look a little different when it comes to liability accounts, which are accounts that show the money a company owes, such as wages, loan payments and supplier payments. Remember, in asset accounts, a debit increases the balance while a credit decreases it. On the other hand, in liability accounts, a debit entry decreases the balance while a credit increases it.

Loans Payable Account

A debit credit example in this case would be if the company takes out a loan for $3,000. In this case, the cash account (asset) is debited for $3,000, while a credit entry is also logged in the loans payable account (liability) as an increase of $3,000. The credit entry shows that the company now owes $3,000 in loans payable but the debit entry shows the company also now has the $3,000 in cash available to spend.

Other common liability subgroup accounts in debit vs credit include accounts payable, income tax payable and bank fees.

Accounts Payable Account

Let’s look at an accounts payable example. If a company buys some office equipment for $7,000 on credit, it will have to record the transaction as money owed in the accounts payable liability subgroup, even though the office equipment itself is an asset. Therefore, the accounting entries are a debit for $7,000 in the office equipment (assets) account, with a corresponding credit entry of $7,000 to balance it out in the accounts payable (liability) account.

Assets are Equal to Liabilities Plus Equity

Essentially, the equation that demonstrates the entire system can be summed up by adding liabilities plus equity, the total of which equals a company’s assets. If you acquire assets, you acquire them by either using equity or taking out a liability such as a loan.

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