Debit and Credit in Accounting and Bookkeeping

Imagine you need to record your cash inflows and outflows to maintain an accurate cash record, ensuring you know how much has been spent, how much has been earned, and how much remains. How would you do that?

You would likely take a piece of paper, write the opening balance as a positive number, add all incoming cash amounts, deduct all outgoing cash amounts, and calculate the net total to determine the closing balance. This method works well, and there’s nothing wrong with it.

However, in accounting and bookkeeping, we use a more structured approach. Instead of using a plain piece of paper, we divide it into two halves, creating two distinct sides:

• The left side is called Debit.

• The right side is called Credit.

One side is used to record increases, while the other side records decreases. The key question is: which side is used to record increases, and which side records decreases? The answer depends on what is being recorded.

The Five Key Categories

All financial transactions are classified into five main categories:

1. Income

2. Expenses

3. Assets

4. Liabilities

5. Equity

Each category follows specific rules for recording increases and decreases.

Debit and Credit Rules

• Assets: An increase is recorded on the debit side, and a decrease is recorded on the credit side.

• Liabilities: The opposite of assets—an increase is recorded on the credit side, and a decrease is recorded on the debit side.

• Equity: Similar to liabilities, an increase is recorded on the credit side, and a decrease is recorded on the debit side, since equity represents the owner's claim on the business.

• Income: Recorded on the credit side when it increases and on the debit side when it decreases.

• Expenses: The opposite of income—an increase is recorded on the debit side, and a decrease is recorded on the credit side.

Understanding how debits and credits work is essential in accounting and bookkeeping. By categorizing transactions correctly and applying these simple rules, businesses can maintain accurate financial records and ensure proper financial reporting.