Debit vs credit: What they mean in small business accounting

Published Wednesday 19 November 2025

Table of contents

• Defining debits vs credits
• Five types of accounts and how debits and credits affect them
• The importance of debits and credits
• Rules you need to know
• Simple examples of debits and credits in action
• Calculating the balance
• Managing your accounting
• Frequently asked questions about debits and credits
• FAQs on debits and credits

Key takeaways

• Apply the fundamental rule that total debits must always equal total credits in every transaction to ensure your books remain balanced and accurate.

• Recognize that debits increase asset and expense accounts while decreasing liability, equity, and revenue accounts, with credits having the opposite effect on each account type.

• Implement double-entry bookkeeping by recording every business transaction in at least two accounts, with one debit entry and one corresponding credit entry of equal amounts.

• Utilize accounting software or professional help to automate debit and credit matching, reduce manual errors, and maintain accurate financial records for tax compliance and business decision-making.

Defining debits vs credits

requires every transaction to have both a debit and a credit entry. This system ensures your books always balance.

Here's how it works:

• Debits: Record money going into an account (left side of ledger)
• Credits: Record money going out of an account (right side of ledger)

Every transaction affects at least two accounts, which is why it is called ‘double-entry’.

Five types of accounts and how debits and credits affect them

Five main account types organize all your business transactions:

• Asset accounts - what your business owns
• Liability accounts - what your business owes
• Equity accounts - your business's net worth
• Revenue accounts - income your business earns
• Expense accounts - costs of running your business

Each account type can include sub-accounts for more detailed tracking, so you can see where money flows in your business.

The five accounts you need to know are:

• Asset account
• Expense account
• Equity account
• Liability account
• Revenue account

Asset account

Asset accounts increase with debits and decrease with credits.

Assets are anything your business owns that has value - from physical items like equipment and inventory to intangible assets like trademarks and patents.

You can add sub-accounts to help organize your asset account. Some common sub-accounts for assets include:

• Petty cash account
• Inventory account
• Accounts receivable
• Bank account

Expense account

Expenses are the cost of doing business. Every business has them. These include wages, office supplies, advertising and rent.

To further organize your expenses, you should create relevant sub-accounts for your business. Some common examples include:

• Cost of goods sold (COGS)
• Insurance expenses
• Payroll expenses
• Rent
• Office expenses

When entering records, a debit increases an expense account and a credit decreases it.

Equity account

Equity refers to the net worth of your business. This is calculated by subtracting your total liabilities from your total assets. Examples of equity include owner’s equity and retained earnings.

Your equity account can be further organized into sub-accounts. Some common ones include:

• Owner's equity
• Retained earnings

When recording transactions in your books, a debit decreases an equity account, and a credit increases it.

Liability account

Liabilities are amounts your business owes but has not yet paid. Examples include sales tax you have collected and payroll tax.

You can further organize your liability account into sub-accounts. Some common sub-accounts include:

• Accounts payable
• Collected sales tax
• Payroll tax

When recording transactions in your general ledger, a debit decreases a liability account, and a credit increases it.

Revenue account

Your revenue account includes all the income your business earns. Examples include sales revenue and earnings from investments.

Sub-accounts help you track where your main income comes from. You can also create sub-accounts within sub-accounts to organize your accounts. Tailor these to your business needs. Examples include:

• Investments
• Product sales: Online sales
• Product sales: Store sales

When recording transactions in your general ledger, a debit decreases a revenue account and a credit increases a revenue account.

The importance of debits and credits

Balanced books mean your total debits equal your total credits. When they match, you know your financial records are accurate.

Why accurate records matter:

• Lenders review them for loan applications
• Tax authorities require them for compliance
• Investors use them to assess business health
• You need them to make informed business decisions

Debits and credits are the key to the double-entry accounting system. For it to work, you must have a debit and a credit for each transaction. If you do not, your financial statements will not be accurate.

Rules you need to know

The fundamental rule: Total debits must always equal total credits. This never changes.

Essential debit and credit rules:

Essential debit and credit rules:

• Debits must equal credits. In a double-entry bookkeeping system, this is essential for balancing your books.
• Debits are always on the left, and credits are always on the right.
• Debits increase assets and expense accounts. Credits are the opposite and decrease them.
• Credits increase liability, revenue, and equity accounts. Debits are the opposite and decrease them.
• Credits and debits have opposite effects and must equal each other in the corresponding account. For example, every debit has a corresponding credit and vice versa.

1. Debits are always on the left, and credits are always on the right.
2. Debits increase assets and expense accounts. Credits are the opposite and decrease them.
3. Credits increase liability, revenue, and equity accounts. Debits are the opposite and decrease them.
4. Credits and debits have opposite effects and must equal each other in the corresponding account. For example, every debit has a corresponding credit and vice versa.

Simple examples of debits and credits in action

Here are a couple of common business transactions to show how debits and credits work in practice.

Example 1: You buy office supplies with cash

Imagine you spend $100 cash on office supplies. In this case, two accounts are affected: your cash account (an asset) and your office supplies account (an expense).

• A debit of $100 is made to your Office Supplies account. This increases your expenses.
• A credit of $100 is made to your Cash account. This decreases your assets.

The debit and credit are equal, so your books stay balanced.

Example 2: You make a $500 sale on credit

A customer buys $500 worth of goods from you but will pay you later. This affects your accounts receivable (an asset) and your sales revenue account.

• A debit of $500 is made to Accounts Receivable. This increases the money owed to you, which is an asset.
• A credit of $500 is made to your Sales Revenue account. This increases your revenue.

Again, the $500 debit and $500 credit match, keeping everything in balance.

Calculating the balance

Calculating account balances follows a simple process:

Step 1: Record each transaction as both a debit and credit

Step 2: Add up all debits and credits in each account

Step 3: Calculate the difference to find your account balance

Step 4: Verify that total debits equal total credits across all accounts

T-accounts help visualize this – the account name goes at the top, debits on the left, credits on the right.

If totals don't match, you have an error that needs fixing before your financial statements will be accurate.

Managing your accounting

Managing accurate books becomes easier with the right approach:

Professional help: Chartered professional accountants (CPAs), accountants, and bookkeepers handle the complexity for you, reducing errors and saving time you can spend growing your business.

Accounting software: Xero accounting software automates debit and credit matching, reduces manual errors and provides real-time financial insights. The software handles the calculations while you focus on business decisions.

Both options ensure your books balance correctly and give you confidence in your financial data.

FAQs on debits and credits

If you still have questions, find answers to common queries about debits and credits below.

Is debit positive or negative?

It depends on the account. A debit isn't inherently positive or negative. It increases asset and expense accounts, but it decreases liability, equity, and revenue accounts. Think of it as a type of entry, not a value judgment.

Does debit or credit mean you owe money?

In business accounting, this is different from a personal bank statement. A debit to a liability account (such as a loan) decreases the amount you owe. A credit to a liability account increases the amount you owe. So, a credit can mean you owe more money.

Is a debit money in or out?

This is a common point of confusion. A debit can be money going out (for example, when you buy something with cash, you debit the expense and credit cash). It can also represent value coming in (for example, when you debit an asset account). Consider which account is being affected and whether a debit increases or decreases that specific account type.