Credit vs. Debit: What’s the Difference in Accounting?

One of the most important financial concepts to understand in accounting is debit vs. credit. Even if you are not pursuing a professional career as an accountant, these concepts are crucial because they impact financial record keeping and business decision-making.

Knowing the difference between debit and credit also matters because most businesses use a double-entry system for accounting. In double-entry accounting, you record every transaction as both a debit and a credit so that the two entries can balance and result in zero.

What Are Debits and Credits?

So, what is a credit, and what is a debit?

Definition of Debit

Simply put, debit represents money flowing into an account.

Debits typically increase assets and expenses. You record debits on the left side of a T-account in double-entry bookkeeping.

Here are some examples of debits:

• Cash deposits
• Equipment purchases
• Salary expenses

Definition of Credit

What is credit? On the other hand, credit represents money flowing out of an account.

Credits typically increase revenue, liabilities, and equity. You record credits on the right side of a T-account in double-entry bookkeeping.

Here are some examples of credits:

• Revenue from sales
• Loan received
• Owner’s investment

How Debits and Credits Affect Different Accounts

To understand debit vs credit, let’s look at how they are reflected in different types of accounts.

Asset Accounts

In asset accounts, a debit means an increase in the amount. Therefore, a credit indicates a decrease in the amount. A debit increase may represent cash, inventory, or equipment purchases. Credit decreases are selling assets and cash withdrawals.

Expense Accounts

For expense accounts, a debit increases the amount, while a credit decreases the amount. Expense debits include rent, wages, and utilities. Meanwhile, the credit decreases could be a refund or overpaid expenses. 

Liability Accounts

Unlike the previous two account examples, a debit in a liability account means a decrease, and a credit represents an increase. A debit decrease in a liability account could result from paying off a loan. A credit increase in this type of account could result from borrowing money or accounts payable.

Equity Accounts

In equity accounts, a debit also is a decrease, and a credit is an increase. Owner withdrawals and dividend payments are examples of debit increases in an equity account. Owner investments and retained earnings are examples of credit increases.

Revenue Accounts

If you have a revenue or income account, a debit is a decrease, and a credit is an increase. A customer refund is an example of a debit decrease in a revenue account. Sales revenue and service fees are credit increases.

The Double-Entry Accounting System

A single-entry accounting system only records revenues and expenses. However, a double-entry system includes assets, liabilities, and equity. Assets are what you own, liabilities are what you owe, and equity is what’s left over for you.

Every financial transaction affects at least two accounts in a double-entry accounting system. Money coming into one account must come out of another. Most businesses use this system because it ensures that debit and credit in accounting always balance out to maintain accurate financial records.

Common Business Transactions with Debit and Credit Entries

Now that you know debit and credit meanings, how do these concepts come into play in business?

Purchasing Equipment

When a business buys equipment, equipment (debit) increases, and the cash (credit) decreases. Both the debit and credit are considered assets.

Taking Out a Business Loan

When a business takes out a loan, the cash (debit) increases, and the loan payable (credit) also increases. The debit is an asset, while the credit is a liability.

Paying Employee Salaries

When a business pays its employees’ salaries, the salary expense (debit) increases, and the cash (credit) decreases. The debit in this example is an expense, while the credit is an asset.

Earning Revenue from Sales

When a business earns revenue from its sales, both the accounts receivable (debit) and the revenue (credit)  increase. The debit here is an asset, and the credit is revenue.

Key Rules for Debit and Credit Entries

As you learn more about debit vs credit, here are some key rules to remember about debit and credit entries:

• Debit increases assets and expense accounts.
• Credit decreases assets and expense accounts.
• Debit decreases liability, equity, and revenue accounts.
• Credit increases liability, equity, and revenue accounts.
• Each transaction must have balanced debits and credits to maintain accurate financial records.

Tips for Managing Debit vs. Credit Accounting

We hope you now understand the answer to “What is debit and credit in accounting?” and perhaps apply this knowledge to your own personal or business finances.

Keep these key rules handy to remind yourself how debit vs. credit accounting concepts work in real life. However, the most important thing to keep in mind is that accurate bookkeeping is essential for business success.

If you need professional financial assistance, please contact Tower Loan. We have many branch locations staffed with financial experts who can answer your additional questions in person or over the phone.

Our online loans are fast, convenient, and affordable so that you can immediately get the money you need. We also provide resources and information about important financial topics that matter to you on our blog.