Debits and Credits Explained: T-Accounts and Journal Entries
Debit is the left side of an account, credit the right side. Four rules tell you where every transaction goes.
Updated
What are debits and credits?
In double-entry bookkeeping every item has its own account, such as cash, bank or loan. An account is drawn as a T: the left side is the debit side, the right side the credit side. Neither word means good or bad; they are just the names of the two sides.
The four rules
| Account type | Opening balance | Increase | Decrease |
|---|---|---|---|
| Asset (cash, bank, receivables, machinery) | Debit | Debit | Credit |
| Liability or equity (loan, payables, capital) | Credit | Credit | Debit |
| Expense (rent, wages, purchases) | – | Debit | Credit (corrections only) |
| Income (sales, interest received) | – | Credit | Debit (corrections only) |
The journal entry
Every transaction affects at least two accounts with the same amount, once as a debit and once as a credit. Example: you take £500 out of the bank and put it in the till. Cash (asset) goes up: debit. Bank (asset) goes down: credit.
Dr Cash £500 Cr Bank £500
Bank£500
Cash£500
Check yourself
A customer pays an outstanding invoice of £1,200 by bank transfer. Which entry is right?
You repay £5,000 of a loan from the bank account. Where does the loan go?
More on accounting
Typical exam mistakes
- Reading debit as “owing money”: on an asset account a debit means more assets.
- Using the asset rule for liabilities: a new loan is a credit, a repayment a debit.
- Recording only one side: every transaction needs at least one debit and one credit.
- Recording sales again when the customer pays: income arises when the goods are sold.
Your turn
Three transactions from the journal entry trainer: choose the accounts, enter the amounts and check.
Transaction
Purchase invoice from Evans Ltd for a delivery of goods: £14,300.00 plus 20% VAT, payable within 30 days.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
Why is money in the bank a debit if it belongs to me?+
Because debit is just the left side. Bank is an asset account, and asset accounts increase on the debit side.
What is a compound entry?+
An entry with more than two accounts, for example purchases and input VAT against payables. Total debits still equal total credits.