Debits and Credits Explained
The T-account visual and the golden rules
* Why This Matters
Debits and credits confuse more accounting students than anything else. Not because they're complicated, but because they're taught backwards.
Most textbooks say: "Debit increases assets, credit increases liabilities" and expect you to memorize it. But that's like memorizing the rules of chess without understanding the game.
Here's the truth: Debits and credits aren't magical. They're just directions. Left or right. That's it. And once you see them that way, they stop being confusing and start making sense.
What Are Debits and Credits?
DR
Debit
= Left side of an account
CR
Credit
= Right side of an account
That's literally it. They're directional. Nothing more, nothing less.
The confusion comes because:
- For some accounts, debit = increase (assets, expenses)
- For other accounts, credit = increase (liabilities, equity, revenue)
Why? Because of the accounting equation.
The T-Account: Your Visual Tool
Every account in accounting can be drawn as a T-shape, which is why it's called a T-account:
Debit Side
(Left)
Credit Side
(Right)
Real Example: The Cash Account
When you deposit money in your business bank account, you're adding to the asset called "Cash." In a T-account, you record it on the left (debit) side:
Debit (Left)
Credit (Right)
Balance:
$3,500
The Golden Rules: Why Debits and Credits Work
Here's where it clicks. There are only three golden rules, and they explain everything:
Rule 1: Assets
Debits (Left) = Increase
Credits (Right) = Decrease
Debit (Left)
Credit (Right)
Balance:
$1,300
Why? Because assets go on the LEFT side of the accounting equation (Assets = Liabilities + Equity). They follow the natural direction.
Rule 2: Liabilities & Equity
Debits (Left) = Decrease
Credits (Right) = Increase
Debit (Left)
Credit (Right)
Balance:
$1,200
Why? Because liabilities and equity go on the RIGHT side of the accounting equation. They follow the opposite direction.
Rule 3: Revenues & Expenses
Revenues: Credits increase them (like equity)
Expenses: Debits increase them (opposite of equity)
Debit (Left)
Credit (Right)
Balance:
$3,000
Debit (Left)
Credit (Right)
Balance:
$500
Why These Rules Make Sense
Remember the accounting equation: Assets = Liabilities + Equity
Think of it like a balance scale:
Left Side
ASSETS
Debits increase
Right Side
LIAB + EQUITY
Credits increase
It's not random. It's logical.
Real-World Example: Buying Equipment
Let's say you buy a $5,000 computer for your business using cash.
1Identify the accounts
- Equipment (asset) increases by $5,000 → Debit Equipment
- Cash (asset) decreases by $5,000 → Credit Cash
2Draw the T-accounts
Debit (Left)
Credit (Right)
Balance:
$5,000
Debit (Left)
Credit (Right)
3Record the journal entry
Date: [Today]
(To record purchase of computer)
4Verify the accounting equation
Before:
Assets = $10,000 | Liab = $0 | Equity = $10,000
After:
Assets = $10,000 | Liab = $0 | Equity = $10,000
One asset increased, another decreased—total assets stayed the same!
Another Real Example: Earning Revenue
You complete a project and a customer pays you $2,000 cash.
Identify the accounts:
- Cash (asset) increases by $2,000 → Debit Cash
- Sales Revenue (equity increase) → Credit Sales Revenue
Debit (Left)
Credit (Right)
Balance:
$2,000
Debit (Left)
Credit (Right)
Balance:
$2,000
Date: [Today]
(To record revenue from completed project)
Both sides increased equally—Assets +$2,000, Equity +$2,000. Still balanced!
The Debit/Credit Cheat Sheet
Here's a quick reference for what increases and decreases each account type:
Key Rules to Remember
Debits Always Equal Credits
Every journal entry must balance. If you debit one account, you must credit one or more other accounts by the same amount. No exceptions.
Each Transaction Affects 2+ Accounts
You can't just record a debit and call it done. Every transaction has two sides: where the money comes from and where it goes.
The Equation Must Stay Balanced
If you record debits and credits correctly, the accounting equation will always be in balance. If it's not balanced, you made a mistake.
Common Mistakes (And How to Avoid Them)
Mistake #1: Forgetting That Credits Increase Liabilities
Your first instinct is that credit = bad (like a credit card). But for liabilities and equity, credits increase them. They're good in accounting.
Mistake #2: Reversing Debits and Credits for Expenses
Expenses are tricky because they're "anti-equity." They go up with debits (opposite of regular equity). Remember: expenses reduce profit, so they work opposite to equity.
How to Always Get It Right
Always ask yourself:
- What account is changing? (Is it an asset, liability, equity, revenue, or expense?)
- Is it increasing or decreasing?
- For that account type, does increasing mean debit or credit?
Key Takeaway
Debits and credits aren't magic. They're just directions that follow the accounting equation. Remember the equation, understand the golden rules, and debits and credits become second nature.
Test Your Understanding
Can you apply the debit/credit rules? Try these practice questions.
Question 1: A business purchases supplies for $500 cash. Which accounts increase and decrease?
Question 2: A business borrows $10,000 from a bank. How are debits and credits recorded?
Question 3: A business earns $3,000 in service revenue. Which is correct?
Question 4: In a T-account, which side is the debit side?
Question 5: A business pays $1,000 in rent. How should this be recorded?
Ready to Practice?
You now understand the rules and logic behind debits and credits. The Practice Lab is where you'll use them. Record transactions, draw T-accounts, watch the balance sheet update, and see exactly why debits and credits must balance.
Try the Practice LabWhat's Next?
Now that you understand debits and credits, let's learn journal entries—how to formally record these transactions using the rules we just learned.