Debits and Credits Explained, With Journal Entry Examples

Debits and credits confuse almost everyone at first, mainly because the words sound like they mean "minus" and "plus." They don't. In accounting, a debit is simply the left side of an account and a credit is the right side. Whether a debit increases or decreases an account depends on what kind of account it is.

Once that clicks, the rest is a short table and a lot of practice. This is the part of a financial accounting course that everything else is built on.

Debit means left, credit means right

Picture an account as a T: the account name across the top, a left side and a right side. Entries on the left are debits (abbreviated Dr.) and entries on the right are credits (Cr.). That's the whole definition. Neither word means increase or decrease on its own.

Double-entry bookkeeping adds one rule: every transaction records at least one debit and at least one credit, and total debits equal total credits. That rule is what keeps the books in balance.

Which side increases which account

The normal balance is just the side that increases the account. A balance on the opposite side is abnormal: a Cash account with a credit balance usually signals an error or an overdraft.

One memory aid that sticks for many students: the debit-normal group is assets, expenses and dividends. Everything else on the list is credit-normal. How to memorize a list, a table or a formula sheet has techniques for locking in a table like this one.

Why the rules are shaped this way

The rules aren't arbitrary. They come from the accounting equation:

Assets = Liabilities + Equity

Assets sit on the left of the equation, so they increase on the left (debit). Liabilities and equity sit on the right, so they increase on the right (credit).

Revenues, expenses and dividends are pieces of equity. Revenue raises equity, so it behaves like equity and increases with a credit. Expenses and dividends lower equity, so they increase with a debit, the side that reduces equity. That is why expenses and dividends end up in the same column as assets even though they are not assets.

Six transactions, start to finish

Here is a new corporation's first month, using the same transactions as the course's cards. Each entry is shown with its debits first and its credits below.

1. Issues common stock for $20,000 cash. Cash (asset) goes up, and owners' investment (equity) goes up.

• Dr. Cash 20,000
• Cr. Common Stock 20,000

2. Buys equipment on account for $3,500. Equipment (asset) goes up, and the company now owes a supplier (liability).

• Dr. Equipment 3,500
• Cr. Accounts Payable 3,500

3. Receives $4,000 cash in advance for services next month. Cash goes up. The work isn't done, so this is not revenue yet; it's a liability.

• Dr. Cash 4,000
• Cr. Unearned Revenue 4,000

4. Bills customers $5,500 for services performed. The revenue is earned now even though no cash has arrived, so a receivable (asset) goes up.

• Dr. Accounts Receivable 5,500
• Cr. Service Revenue 5,500

5. Pays a $300 utility bill in cash. An expense goes up and Cash goes down.

• Dr. Utilities Expense 300
• Cr. Cash 300

6. Pays $100 in cash dividends. Dividends go up (lowering equity) and Cash goes down.

• Dr. Dividends 100
• Cr. Cash 100

Every entry has equal debits and credits. That is the minimum check, and the next section is the stronger one.

Check it with a trial balance

Post the entries to their accounts and list every balance. Cash is 20,000 + 4,000 - 300 - 100 = 23,600.

The totals match. You can also check the equation directly: assets are 23,600 + 5,500 + 3,500 = 32,600; liabilities are 3,500 + 4,000 = 7,500; equity is 20,000 + 5,500 - 300 - 100 = 25,100. And 7,500 + 25,100 = 32,600.

A balanced trial balance does not prove the books are right. Recording the right amount to the wrong account still balances. It only proves debits equal credits.

Compound entries

Some transactions touch more than two accounts. Buying $6,000 of equipment with $1,000 cash and a note for the rest:

• Dr. Equipment 6,000
• Cr. Cash 1,000
• Cr. Notes Payable 5,000

One debit of 6,000, two credits totaling 6,000. Performing $5,000 of services where the customer pays $3,000 now and owes $2,000 works the other way:

• Dr. Cash 3,000
• Dr. Accounts Receivable 2,000
• Cr. Service Revenue 5,000

The traps that cost the most points

• Unearned Revenue is a liability, not revenue. Cash received before the work is done is owed back in service. It becomes revenue only when the work is performed (Dr. Unearned Revenue / Cr. Service Revenue).
• Dividends are not an expense. They are a distribution to owners, they reduce retained earnings, and they never appear on the income statement.
• Contra accounts flip the rule. Accumulated Depreciation is attached to an asset but carries a credit balance. Its job is to reduce the asset's book value without changing the original cost.
• Your bank statement uses the bank's point of view. When your bank "credits" your account for a deposit, it is recording that it owes you more money, a liability on its books. On your company's books, the same deposit is a debit to Cash.
• Prepaid items start as assets. Paying $2,400 for 12 months of insurance is Dr. Prepaid Insurance / Cr. Cash. It becomes an expense month by month through adjusting entries.

How to practice

Reading this page won't make the rules automatic; producing entries will. Cover the entry, name the debit and credit for each transaction, then check. Generating the answer yourself is what makes it stick, which is the idea behind the generation effect. Quizzing yourself this way beats rereading a page of finished entries, as the testing effect research shows. Keep doing a handful a day for a couple of weeks, and mix transaction types rather than doing ten of the same kind in a row.

How to study for Financial Accounting lays out a full semester plan built around this skill, and what's in Financial Accounting shows where debits and credits reappear in every later unit, from adjusting entries to bonds.

The same bookkeeping logic shows up in economics. Microeconomics starts from accounting profit (revenue minus explicit costs) and then subtracts implicit costs to get economic profit; how to study for Microeconomics covers that course's methods, and what's in Principles of Macroeconomics shows how GDP applies an accounting identity to a whole economy.

Encodr's free Financial Accounting flashcards drill these entries as typed and multiple-choice cards in unit 3 and reuse them throughout. The course is one of the free college gen-ed courses on Encodr.