Nrdly
Get Nrdly Free Trial Built with Nrdly

How to Know What to Debit and What to Credit in Accounting

If you’re not used to speaking the language of accounting, understanding debits and credits can seem confusing at first.

In accounting, Debit means the left side of an account and Credit means the right side of an account. Debit on the left. Credit on the right. We increase and decrease accounts by debiting them or crediting them. Knowing whether to debit or credit an account depends on the Type of Account and that account’s Normal Balance. An account’s Normal Balance is based on the Accounting Equation and where that account is in the equation. The account types are Asset, Liability, Equity, Dividends, Revenue, Expense. To increase an Asset, Dividend, or Expense account, we debit. To decrease those accounts, we credit. To increase an Equity (Capital), Revenue, or Liability account, we credit. To decrease those accounts, we debit.  .

What is the Accounting Equation?

Before you can understand debits and credits, you’ll need a little background on the structure of accounting. It all starts with the Accounting Equation. The Accounting Equation is the structure of double entry accounting. It categorizes accounts into different account types.

Basic Accounting Equation:

Assets = Liabilities + Equity (also known as Capital)

Expanded Accounting Equation:

Assets = Liabilities + Equity – Dividends + Revenue – Expenses

Accounting Equation Demystified!

Each account type has a normal balance. That normal balance is what determines whether to debit or credit an account in an accounting transaction.

What are the Normal Balances of each type of account?

Normal Debit Balance:

Assets, Dividends (or Owner’s Withdrawals), Expenses

Increase by Debit, Decrease by Credit

Normal Credit Balance:

Liabilities, Capital (or Owner’s Equity), Revenue

Increase by Credit, Decrease by Debit

Normal Balances Simplified

What are Debits and Credits Used for in Accounting?

Think of debits and credits as pulling the levers to make changes in an account. If you debit an asset, you are telling your accounting system to increase it. If you credit an asset, you are telling your accounting system to decrease it.

Let’s use your checking account as an example. Let’s deposit some money into the account. That means the balance is increasing.

  1. What type of account is it? A bank account is an Asset.
  2. What is the Normal Balance of an Asset? An Asset has a Normal Debit Balance.
  3. Are we increasing the Asset or decreasing the Asset? We are increasing.
  4. How do you increase an Asset? By debiting it.

Now, let’s say we withdraw some cash from the account. The balance is decreasing.

  1. What type of account is it? A bank account is an Asset.
  2. What is the Normal Balance of an Asset? An Asset has a Normal Debit Balance.
  3. Are we increasing the Asset or decreasing the Asset? We are decreasing.
  4. How do you decrease an Asset? By crediting it.
Debits and Credits Explained

What is Double Entry Accounting?

But we aren’t just increasing or decreasing the Asset. There’s another side to this transaction. We also want to know where the money we deposited came from and where the money we withdrew went to. This is called double entry accounting. It allows us to collect information about the transactions that happen in a business.

Let’s say the deposit we made is from the sale of some products in our business. We want to track that sale. We do this using a Revenue account, let’s call our Revenue account Product Sales. When you sell a product, your Revenue increases.

  1. What type of account is it? A Revenue account.
  2. What is the Normal Balance of a Revenue account? A Revenue account has a Normal Credit balance.
  3. Are we increasing the Revenue or decreasing the Revenue? We are increasing.
  4. How do you increase a Revenue? By crediting it.

Now, let’s say the money we withdrew from our checking account was to purchase some office supplies for the business. Office Supplies is an expense for the business.

  1. What type of account is it? An Expense account.
  2. What is the Normal Balance of an Expense account? An Expense account has a Normal Debit balance.
  3. Are we increasing the Expense or decreasing the Expense? We are increasing our Expense.
  4. How do you increase an Expense? By debiting it.

How do You do Journal Entries in Accounting?

Journal Entries are where we do our debiting and crediting. A journal entry is a set format accountants use to record what accounts are being increased and decreased. Here’s the format:

DebitCredit
DateAccount Name  
      Account Name  
Description  

Let’s bring our transactions together in our journal format.

We made a deposit in our checking account. The money came from Product Sales. We’ll say it was $1,000. We are increasing our Asset called “Checking” and increasing our Revenue called “Product Sales.”

DebitCredit
Jan 1, xxChecking1000 
      Product Sales 1000
Sold product to customers 

By debiting our asset, we have increased it. By crediting our revenue, we have increased it.

We also withdrew money from our Checking account. And, we spent it on office supplies. We are decreasing our Asset called “Checking” and we are increasing our Expense called Office Supplies Expense. We’ll say it was $50.

DebitCredit
DateOffice Supplies Expense50 
      Checking 50
Purchased office supplies  

By debiting our expense, we have increased it. By crediting our asset we have decreased it.

Introduction to Journal Entries

What Happens After the Journal Entry?

Let’s look at what happened to the balances of these three accounts after our journal entries:

When the journal entries we completed are posted to the accounts, this caused changes in the account balances. That’s the journal entries’ entire reason for existing—making changes in accounts.

Is There an Easy Way to Remember Normal Balances for Accounts?

Here are two methods for remembering which accounts have Normal Debit or Normal Credit Balances. Choose the one that works best for you!

After Eating Dinner, Let’s Read Comics

  DebitCredit
AfterAssets+
EatingExpenses+
DinnerDividends+
  
Let’sLiabilities+
ReadRevenue+
ComicsCapital+

DEALER

 DebitCredit
Dividends+
Expenses+
Assets+
  
Liabilities+
Equity+
Revenue+

Debits and Credits Step by Step

  1. For each transaction, determine what accounts are impacted. (Example: Cash and Product Sales)
  2. For each account, determine if the account is increasing or decreasing. (Example: Cash is increasing and Product Sales is increasing.)
  3. What type of accounts are these? (Example: Cash is an Asset. Product Sales is a Revenue.)
  4. What is the Normal Balance for those accounts? (Assets have Normal Debit balance and Revenue has Normal Credit balance)
  5. To increase the Asset called Cash, debit it. To increase the Revenue called Product Sales, credit it.
  6. Record the journal entry using the journal entry structure.
Journal Entry Practice Exercises

Some Good News!

For everyday accounting transactions, there are only a few that repeat over and over. You buy something, you sell something. Once you learn the basic journal entries, you’ll use them over and over again. That means, it gets easier once you learn it the first time. Remember, accounting is a skill. The more you practice, the easier it becomes.