{"id":15794,"date":"2023-08-29T09:08:21","date_gmt":"2023-08-29T08:08:21","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=15794"},"modified":"2025-03-14T16:13:20","modified_gmt":"2025-03-14T16:13:20","slug":"what-are-debits-and-credits","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/what-are-debits-and-credits\/","title":{"rendered":"What are debits and credits?"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-gb\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tWhat are debits and credits?\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2023-08-29T09:08:21+01:00\">29 August, 2023<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"What are debits and credits?\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-gb\/blog\/what-are-debits-and-credits\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-gb\/blog\/author\/staceymcintosh\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2018\/11\/Stacey-McIntosh-350-1.jpg\" class=\"entry-author__image\" alt=\"\" \/>\t\t\t\t<span class=\"entry-author__name\">Stacey McIntosh<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n<p>If you\u2019ve ever peeked into the world of accounting, you\u2019ve likely come across the terms \u201cdebit\u201d and \u201ccredit\u201d. Understanding these terms is fundamental to mastering double-entry bookkeeping and the language of accounting.<\/p>\n\n\n\n<p>But what are debits and credits exactly? Why are they so important in the accounting world? Continue reading to discover how these fundamental concepts are the heartbeat of every financial transaction and the backbone of the accounting system.<\/p>\n\n\n\n<p>Here&#8217;s what we cover:<\/p>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#h-understanding-the-basics-debit-vs-credit\" data-level=\"2\">Understanding the basics: Debit vs credit<\/a><ul><li><a href=\"#h-unpacking-the-double-entry-bookkeeping-system\" data-level=\"3\">Unpacking the double-entry bookkeeping system<\/a><\/li><li><a href=\"#h-what-is-a-debit-and-a-credit-in-accounting\" data-level=\"3\">What is a debit and a credit in accounting?<\/a><\/li><\/ul><\/li><li><a href=\"#h-are-balance-sheet-accounts-debits-or-credits\" data-level=\"2\">Are balance sheet accounts debits or credits?<\/a><\/li><li><a href=\"#h-what-about-income-statement-accounts-where-do-debits-and-credits-apply\" data-level=\"2\">What about Income Statement Accounts: Where do debits and credits apply?<\/a><\/li><li><a href=\"#h-debits-and-credits-in-day-to-day-business-operations\" data-level=\"2\">Debits and credits in day-to-day business operations<\/a><ul><li><a href=\"#h-more-examples-of-how-to-debit-and-credit-business-transactions\" data-level=\"3\">More examples of how to debit and credit business transactions<\/a><\/li><\/ul><\/li><li><a href=\"#h-special-considerations-unusual-cases-of-debits-and-credits\" data-level=\"2\">Special considerations: Unusual cases of debits and credits<\/a><\/li><li><a href=\"#h-final-thoughts-mastering-debits-and-credits\" data-level=\"2\">Final thoughts: Mastering debits and credits<\/a><\/li><\/ul><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-understanding-the-basics-debit-vs-credit\">Understanding the basics: Debit vs credit<\/h2>\n\n\n\n<p>In accounting, every financial transaction affects at least two accounts due to the <a href=\"https:\/\/www.investopedia.com\/terms\/d\/double-entry.asp\" target=\"_blank\" rel=\"noopener noreferrer\">double-entry bookkeeping system<\/a>. This system is a cornerstone of accounting that dates back centuries.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-unpacking-the-double-entry-bookkeeping-system\">Unpacking the double-entry bookkeeping system<\/h3>\n\n\n\n<p>The double-entry bookkeeping system requires that every business transaction is recorded in at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) stays in balance.<\/p>\n\n\n\n<p>This system is based on the concept of debits and credits. In this context, debits and credits represent two sides of a transaction. Depending on the type of account impacted by the entry, a debit can increase or decrease the value of the account. The same is true for a credit.<\/p>\n\n\n\n<p>If a transaction increases the value of one account, it must decrease the value of at least one other account by an equal amount.<\/p>\n\n\n\n<p>Why is this system so vital? Here are a few key reasons:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><p dir=\"ltr\">Ensures accuracy: The double-entry system acts as a check and balance mechanism. If the total debits do not equal the total credits on the trial balance, it\u2019s a clear sign that an error has occurred somewhere in the recording process.<\/p><\/li>\n\n\n\n<li><p dir=\"ltr\">Provides a complete transaction picture: Unlike single-entry bookkeeping, which only records one aspect of a transaction, the double-entry system gives a comprehensive view of the transaction, showing both where the resource came from and where it went.<\/p><\/li>\n\n\n\n<li><p dir=\"ltr\">Facilitates financial analysis and decision-making: By providing a complete picture of a company\u2019s financial activities, the double-entry bookkeeping system enables detailed financial analysis. This can help business leaders make informed decisions, from operational changes to investment strategies.<\/p><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-what-is-a-debit-and-a-credit-in-accounting\">What is a debit and a credit in accounting?<\/h3>\n\n\n\n<p>One or more accounts get a debit entry, while other accounts receive a credit entry. But what does it mean for an account to be debited or credited? In order to understand this, it\u2019s important to consider <a href=\"https:\/\/www.theforage.com\/blog\/skills\/accounting-equation\" target=\"_blank\" rel=\"noopener noreferrer\">the accounting equation: Assets = Liabilities + Equity<\/a>.<\/p>\n\n\n\n<p>This equation, the heart of accounting, provides a logical structure for recording and interpreting every financial transaction in the double-entry bookkeeping system. Understanding this equation is vital for grasping the concept of debits and credits, as the equation helps us decide whether to debit or credit an account in a transaction. Let\u2019s take a look at each part of the equation.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-assets\">Assets<\/h4>\n\n\n\n<p>Assets are resources owned by the company that are expected to provide future benefits. They can include cash, accounts receivable, inventory, buildings, and equipment. When you increase an asset account, you debit it, and when you decrease an asset account, you credit it.<\/p>\n\n\n\n<p>For example, when a company receives cash from a sale, it debits the Cash account because cash\u2014an asset\u2014has increased. On the other hand, if the company pays a bill, it credits the Cash account because its cash balance has decreased.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-liabilities\">Liabilities<\/h4>\n\n\n\n<p>Liabilities represent obligations the company has. Accounts payable, notes payable, and accrued expenses are common examples of liability accounts. When a company incurs a new liability or increases an existing one, it credits the corresponding liability account. Conversely, when it pays off or reduces a liability, it debits the liability account.<\/p>\n\n\n\n<p>For instance, if a company purchases supplies on credit, it increases its Accounts Payable\u2014a liability account\u2014by crediting it. When the company later pays off this payable, it reduces the liability by debiting Accounts Payable.<\/p>\n\n\n\n<p>Assets and liabilities are on the opposite side of the accounting equation. Notice they are increased by using opposite actions. Assets are increased with debits and liabilities are increased with credits. If I was using a spreadsheet to demonstrate this, I would put a negative sign before each credit entry, even though this does not indicate the account is in a negative balance.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-equity\">Equity<\/h4>\n\n\n\n<p>Equity, often referred to as shareholders\u2019 equity or owners\u2019 equity, represents the ownership interest in the business. It\u2019s the residual interest in the assets of the entity after deducting liabilities. In other words, equity represents the net assets of the company.<\/p>\n\n\n\n<p>Equity accounts, like common stock or retained earnings, increase with credits and decrease with debits. This is the opposite of asset accounts. For example, when a company earns a profit, it increases Retained Earnings\u2014a part of equity\u2014by crediting it.<\/p>\n\n\n\n<p>Understanding how the accounting equation interacts with debits and credits provides the key to accurately recording transactions. By maintaining balance in the accounting equation when recording transactions, you ensure the financial statements accurately reflect a company\u2019s financial health.<\/p>\n\n\n\n<p>A debit (abbreviated as Dr) increases the balance of an asset or expense account, while a credit (abbreviated as Cr) does the opposite\u2014it decreases the balance of these accounts. However, for liability, equity, and revenue accounts, the rules are flipped: debits decrease their balances and credits increase them. This might sound complicated, but it all comes down to the fundamental accounting equation and where individual accounts fit.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-are-balance-sheet-accounts-debits-or-credits\">Are balance sheet accounts debits or credits?<\/h2>\n\n\n\n<p>In short, balance sheet and income statement accounts are a mix of debits and credits. The balance sheet consists of assets, liabilities, and equity accounts. In general, assets increase with debits, whereas liabilities and equity increase with credits.<\/p>\n\n\n\n<p>For instance, when a company purchases equipment, it debits (increases) the Equipment account, which is an asset account. If the company owes a supplier, it credits (increases) an accounts payable account, which is a liability account.<\/p>\n\n\n\n<p>When a business incurs a net profit, <a href=\"https:\/\/www.accountingtools.com\/articles\/what-are-retained-earnings.html\" target=\"_blank\" rel=\"noopener noreferrer\">retained earnings<\/a>, an equity account, is credited (increased).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-about-income-statement-accounts-where-do-debits-and-credits-apply\">What about Income Statement Accounts: Where do debits and credits apply?<\/h2>\n\n\n\n<p>Income statement accounts primarily include revenues and expenses. Revenue accounts like service revenue and sales are increased with credits. For example, when a company makes a sale, it credits the Sales Revenue account.<\/p>\n\n\n\n<p>Expenses, including rent expense, cost of goods sold (COGS), and other operational costs, increase with debits. When a company pays rent, it debits the Rent Expense account, reflecting an increase in expenses.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-debits-and-credits-in-day-to-day-business-operations\">Debits and credits in day-to-day business operations<\/h2>\n\n\n\n<p>In daily business operations, it\u2019s essential to know whether an account should be debited or credited. The easiest way to understand this is to think of the accounting equation and remember what type of account you are dealing with.<\/p>\n\n\n\n<p>Let\u2019s say a company purchases inventory on credit. <a href=\"https:\/\/www.sage.com\/en-us\/blog\/inventory-mistakes\/\" rel=\"noopener noreferrer\">Inventory <\/a>is an asset, which we know increases by debiting the account. When an item is purchased on credit, the company now owes their supplier. This is an account payable which is a liability. Liabilities are on the opposite side of the accounting equation to assets, so we know we need to increase the liability account by crediting it.<\/p>\n\n\n\n<p>What about a cash sale? Is that a debit or a credit?<\/p>\n\n\n\n<p>Let\u2019s break it down:<\/p>\n\n\n\n<p>Both the cash and the sales (or revenue) accounts increase in this transaction. Cash is an asset, so it increases with a debit. Sales are part of equity, so they increase with a credit. If the cash sale was for \u00a32,000, your entry would look like this:<\/p>\n\n\n\n<p>Cash (Dr) \u00a32,000<\/p>\n\n\n\n<p>Sales or Revenue (Cr) \u00a32,000<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-more-examples-of-how-to-debit-and-credit-business-transactions\">More examples of how to debit and credit business transactions<\/h3>\n\n\n\n<p>Let\u2019s consider another example. Suppose a company provides services worth \u00a3500 to a customer who promises to pay at a later date. In this case, the company would debit Accounts Receivable (an asset) and credit Service Revenue.<\/p>\n\n\n\n<p>In another scenario, if a company rents a warehouse for \u00a31,000, it would debit the Rent Expense account (an expense) and credit the Cash or Accounts Payable account (depending on how the customer paid).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-special-considerations-unusual-cases-of-debits-and-credits\">Special considerations: Unusual cases of debits and credits<\/h2>\n\n\n\n<p>While we\u2019ve covered the general rules for debits and credits in relation to the accounting equation, there\u2019s an important exception worth noting: contra accounts.<\/p>\n\n\n\n<p>Contra accounts are unique types of accounts that have an opposite balance to the normal balance of their associated accounts. They are used to reduce the value of the related account without impacting the balance of the related account.<\/p>\n\n\n\n<p>The most common contra account is Accumulated Depreciation. This is a contra asset account used to record the use of a capital asset. Because this is a contra account, increasing it requires a credit rather than a debit. To record depreciation for the year, Depreciation Expense is debited and the contra asset account Accumulated Depreciation is credited. The balance of both accounts increases.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-final-thoughts-mastering-debits-and-credits\">Final thoughts: Mastering debits and credits<\/h2>\n\n\n\n<p>Understanding debits and credits is foundational in accounting. They\u2019re the building blocks that help us record, analyse, and interpret financial transactions. Despite feeling a bit daunting, with a firm grasp on the basics and practice, these concepts will become second nature.<\/p>\n\n\n\n<p>To know whether you should debit or credit an account, keep the accounting equation in mind. Assets and expenses generally increase with debits and decrease with credits, while liabilities, equity, and revenue do the opposite.<\/p>\n\n\n\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to the Sage Advice newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Join more than 500,000 UK readers and get the best business admin strategies and tactics, as well as actionable advice to help your company thrive, in your inbox every month.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-b1a63862-3fa0-4a5e-bb67-c76b88bbc6b8\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Subscribe now<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2022\/04\/GettyImages-1073797282-1-1440x810.jpg\" class=\"single-cta__image\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2022\/04\/GettyImages-1073797282-1-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Demystify accounting fundamentals with this comprehensive guide to debits and credits, their roles in transactions, and double-entry bookkeeping.<\/p>\n","protected":false},"author":346,"featured_media":15828,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[6],"tags":[135],"business_type":[4,3],"lilypad":[],"context":[],"industry":[],"persona":[],"imagine_tag":[],"coauthors":[353],"class_list":["post-15794","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","tag-business-finances","business_type-small-business","business_type-medium-sized-business"],"sage_meta":{"region":"en-gb","author_name":"Stacey McIntosh","featured_image":"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2023\/08\/GettyImages-1261563841-1.jpg","imagine_tags":[]},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice UK","distributor_original_site_url":"https:\/\/www.sage.com\/en-gb\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts\/15794","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/users\/346"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/comments?post=15794"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts\/15794\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/media\/15828"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/media?parent=15794"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/categories?post=15794"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/tags?post=15794"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/business_type?post=15794"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/lilypad?post=15794"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/context?post=15794"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/industry?post=15794"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/persona?post=15794"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/imagine_tag?post=15794"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/coauthors?post=15794"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}