Debits and Credits in Accounting Explained
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
A debit is an entry on the left side of an account and a credit is an entry on the right. Whether each one increases or decreases a balance depends on the type of account.
Key takeaways
- Debits increase assets, expenses and dividends, and they decrease liabilities, equity and revenue.
- The DEALER memory aid marks Dividends, Expenses and Assets as debit-normal and the rest as credit-normal.
- Matching trial balance totals can still hide errors such as an omitted entry or a posting to the wrong account.
- Contra assets like accumulated depreciation carry credit balances that reduce the main account's value.
A debit is an entry on the left side of an account in double-entry bookkeeping, and a credit is an entry on the right side. Neither word means “good” or “bad,” and neither always means “increase” or “decrease.” What a debit does depends on the type of account it hits. A debit increases assets, expenses and dividends (or owner’s draws), and it decreases liabilities, equity and revenue. A credit does the reverse. Every transaction is recorded with at least one debit and at least one credit of equal total value, so the books stay in balance.
How Debits and Credits Work
The system rests on the accounting equation:
Assets = Liabilities + Equity
Assets sit on the left of the equation, so they increase on the left (debit) side of their accounts. Liabilities and equity sit on the right, so they increase on the right (credit) side. Revenue and expenses are temporary accounts that eventually close into equity: revenue raises equity, so it increases with credits, and expenses reduce equity, so they increase with debits.
On a T-account, the debit column is always on the left and the credit column on the right. In a standard journal entry, the debit lines are listed first and the credit lines below them, usually indented. The abbreviations are “Dr” for debit and “Cr” for credit.
To decide which side an entry goes on, ask what type of account each one is and whether it is going up or down.
Normal Balances
An account’s normal balance is the side on which it increases, and therefore the side where its balance usually sits.
| Account type | Increases with | Decreases with | Normal balance |
|---|---|---|---|
| Assets | Debit | Credit | Debit |
| Expenses | Debit | Credit | Debit |
| Dividends / owner’s draws | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Equity | Credit | Debit | Credit |
| Revenue | Credit | Debit | Credit |
A common memory aid is DEALER: Dividends, Expenses and Assets are debit-normal; Liabilities, Equity and Revenue are credit-normal.
Assets carry debit balances because of where they sit in the equation, not because owning something is inherently a debit. Expenses carry debit balances because they reduce equity, which is credit-normal, so interest expense, cost of goods sold and any “other expense” account are all debit-normal.
Worked Example: Five Journal Entries
Hypothetical company, figures chosen for illustration.
- Owner invests $10,000 cash. Debit Cash $10,000 (asset up). Credit Owner’s Equity $10,000 (equity up).
- Buys equipment for $4,000 with a bank loan. Debit Equipment $4,000 (asset up). Credit Notes Payable $4,000 (liability up).
- Earns $2,500 of service revenue in cash. Debit Cash $2,500 (asset up). Credit Service Revenue $2,500 (revenue up).
- Pays $800 rent. Debit Rent Expense $800 (expense up). Credit Cash $800 (asset down).
- Repays $1,000 of the loan. Debit Notes Payable $1,000 (liability down). Credit Cash $1,000 (asset down).
Entry 5 shows why “debit = increase” is wrong as a general rule: the debit there shrinks a liability.
After posting, the balances are:
| Account | Debit | Credit |
|---|---|---|
| Cash ($10,000 + $2,500 − $800 − $1,000) | $10,700 | |
| Equipment | $4,000 | |
| Rent Expense | $800 | |
| Notes Payable ($4,000 − $1,000) | $3,000 | |
| Owner’s Equity | $10,000 | |
| Service Revenue | $2,500 | |
| Total | $15,500 | $15,500 |
Why Total Debits Always Equal Total Credits
Each entry is built to balance before it is posted, so the sum of every debit in the ledger has to equal the sum of every credit. A trial balance lists each account’s ending balance in the debit or credit column to confirm that equality. An adjusted trial balance does the same after period-end adjustments such as accruals and depreciation.
If the totals don’t match, something went wrong in recording or posting: a one-sided entry, a transposed number, or a balance placed in the wrong column. A matching total, however, is not proof the books are correct. An entry posted to the wrong account, an omitted transaction or an error duplicated on both sides still produces equal totals.
The balances then flow into the financial statements. Asset, liability and equity accounts appear on the balance sheet, while revenue and expense accounts build the income statement.
Contra Accounts
A contra account is paired with a main account and carries the opposite normal balance, reducing the main account’s reported value. The allowance for doubtful (uncollectible) accounts offsets accounts receivable, and accumulated depreciation offsets equipment or other fixed assets. Both are contra assets with normal credit balances.
Entries therefore work in reverse. Recording more expected bad debt credits the allowance, increasing it and lowering net receivables. Writing off a specific uncollectible customer debits the allowance, decreasing it. Contra revenue accounts such as sales returns and allowances are debit-normal for the same reason.
Debit Notes
A debit note is a business document, not a ledger entry, though it supports one. One business sends it to another to request or record an adjustment to a transaction that has already happened. A buyer returning goods to a supplier may issue a debit note stating the amount it expects back. Debit notes are also used to correct invoice errors, often involving interest or fees, and a business may issue one in response to a credit note it received.
The difference from an invoice: an invoice records a sale, while a debit note records an adjustment or return on an existing sale.
Debit Balance in a Margin Account
In brokerage accounts, “debit balance” carries a specific meaning. When an investor buys securities on margin, the broker lends part of the purchase price. The debit balance is the amount the customer owes the broker for that loan.
Hypothetical example: an investor buys $10,000 of stock, puts up $5,000 of their own cash and borrows the remaining $5,000. The margin account shows a $5,000 debit balance, plus interest as it accrues. Under the Federal Reserve’s Regulation T, the initial margin requirement for most stock purchases is 50%.
An account holding only short positions shows a credit balance instead: the proceeds from the short sale plus the margin required under Regulation T. When an account holds both long and short positions, the adjusted debit balance is the amount owed to the broker minus profits on short sales and any balance in the special memorandum account (SMA).
Bank Statements vs. Accounting Books
When you deposit money, your bank says it credits your account, yet the same cash is a debit on your own books. Both are correct.
Your deposit is a liability for the bank, since it owes you that money. A deposit raises a liability on the bank’s books, which is a credit. In your own records, the cash is an asset you control, so it is a debit. A bank “debit” (a withdrawal, fee or debit-card purchase) lowers what the bank owes you.
Limitations and Common Mistakes
- “Debit means increase.” True only for debit-normal accounts.
- “Credit means good, debit means bad.” The terms are positional, not judgments. A big debit to cash is welcome; a big credit to a liability means more debt.
- Abnormal balances. An account can end on its opposite side, such as an overdrawn cash account showing a credit balance. That is usually a signal to investigate or reclassify, not a bookkeeping rule violation.
FAQs
Are dividends a debit or a credit?
Dividends declared are recorded as a debit, because they reduce equity. The usual offset is a credit to dividends payable (a liability) until the cash is paid, then a debit to dividends payable and a credit to cash.
Can a single transaction have more than one debit or credit?
Yes. A compound entry might debit equipment for $6,000 while crediting cash for $2,000 and notes payable for $4,000. The only requirement is that total debits equal total credits within the entry.
The Bottom Line
Anyone learning bookkeeping or reading a ledger needs to treat debits and credits as left and right positions rather than as good or bad, or as increase and decrease. The right side for any entry comes from the account type and whether that account is rising or falling. Bank statements and margin accounts use the same terms from the institution's own viewpoint, so a bank credit to your deposit is a debit to cash on your books.
