What it means
In everyday speech a debit sounds like a deduction, as when a bank takes money from your account. In accounting, the word is more neutral, and it simply means the left side of a ledger entry.
Whether a debit makes a balance rise or fall depends on the kind of account involved. The easy way to remember it is that debits increase assets and expenses, while credits increase liabilities, equity and income.
If a business buys a laptop for cash, the equipment account is debited because the asset has grown, and the cash account is credited because that asset has shrunk. The two sides of the entry always total the same amount.
This rule is the backbone of double entry bookkeeping, the system in which each transaction affects at least two accounts. Because total debits must equal total credits, the trial balance (a list of all account balances) acts as a quick check for errors.
If the totals differ, something has been recorded wrongly. The confusion for non-finance people often comes from bank statements.
A bank describes your account as credited when you receive money, because from the bank's viewpoint your deposit is a liability it owes you. The same word therefore points in a different direction depending on whose books you are reading.
Debits also appear in banking and payments in the form of debit cards and direct debits, where money is taken from an account. Those are everyday uses of the word and are related, but the accounting meaning is about the side of the entry rather than the movement of cash alone.
A useful habit is to say each entry out loud in plain words before posting it. For the laptop purchase, that would be that the business now has more equipment and less cash.
If the sentence makes sense, the debit and credit are almost certainly on the right sides.
In practice
Real-world examples
Example 1
A consultancy pays its monthly rent of $3,500 from its bank account. The accountant debits Rent Expense by $3,500 and credits Cash by $3,500. The expense grows on the debit side while the asset falls on the credit side.
Example 2
A manufacturer receives a delivery of raw materials worth $18,000 on credit. It debits Inventory by $18,000 and credits Accounts Payable by $18,000. The balance sheet now shows more stock and a larger amount owed to suppliers.
Example 3
A customer pays an outstanding invoice of $6,000 by bank transfer. The business debits Cash by $6,000 and credits Accounts Receivable by $6,000. One asset has simply replaced another, so total assets stay the same.
Think of it
Debits are like adding items to one side of a scale. Whatever you add must be balanced by changes on the other side.
Formula
Calculation
Total debits = Total credits
Suppose a company buys equipment for $12,000 and pays $5,000 in cash, with the remaining $7,000 on credit from the supplier. The journal entry is a debit to Equipment of $12,000, a credit to Cash of $5,000, and a credit to Accounts Payable of $7,000. Total debits are $12,000 and total credits are 5,000 + 7,000 = $12,000. The two sides agree, so the entry is balanced.Case study
Seen in the real world
Marlow and Finch is an illustrative, fictional design studio whose new bookkeeper noticed that the trial balance was out by $900. Total debits were higher than total credits, so she knew an entry had been recorded on one side only.
She traced the problem to a $900 software subscription that had been debited to expenses but never credited to the bank account. Because the payment had come through the company card, the bookkeeper had forgotten the second half of the entry.
After she posted the missing credit, the books balanced and the studio's cash figure matched the bank statement. The illustrative lesson was that the rule of equal debits and credits catches mistakes automatically, provided someone checks the trial balance regularly.
Watch out
Common mistakes
- Thinking a debit always means a decrease, which is true for a bank customer's view of cash but not for asset and expense accounts in the books.
- Recording only one side of a transaction, which leaves the trial balance out of balance and the accounts unreliable.
- Reading a bank's statement as if the words debit and credit meant the same thing as they do in your own ledger.
Questions
People also ask
Does a debit always reduce cash?
No, a debit to the cash account increases it, whereas a credit to the cash account reduces it.
Why do banks say my account was credited when I receive money?
From the bank's point of view your balance is money it owes you, which is a liability, and liabilities increase with credits.
How do I remember which accounts increase with debits?
A common memory aid is that assets and expenses go up with debits, while liabilities, equity and income go up with credits.
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