Debits and Credits: Double-Entry Bookkeeping with Examples

Double-entry bookkeeping is the method virtually every business in the world uses to record transactions. The Italian mathematician Luca Pacioli described it in 1494, and the idea hasn't changed since: every transaction affects at least two accounts, and the amount recorded on one side must equal the amount recorded on the other. That simple rule is what lets accounting check itself.

Debit means left, credit means right

Every account can be drawn as a "T" with two sides:

                 CASH
        DEBIT        |       CREDIT
     (left side)     |    (right side)
---------------------+---------------------
  entries go here    |   entries go here

• Debit (Dr) = the left side. Recording an amount there is "debiting" the account.
• Credit (Cr) = the right side. Recording an amount there is "crediting" the account.

The rules come straight from the equation

The accounting equation puts assets on the left and liabilities plus equity on the right. So accounts on the left side of the equation increase on the left (debit), and accounts on the right side increase on the right (credit). Revenue increases equity, so it behaves like equity; expenses and draws reduce equity, so they behave the opposite way:

Put the two halves together and you get "DEALER," the memory trick generations of accounting students have used. A normal balance is the side where an account usually ends up. If Cash ever shows a credit balance, you're either overdrawn or something was recorded wrong.

The journal entry

Each transaction is recorded as a journal entry: the date, the accounts debited, the accounts credited, the amounts and a short description (the memo). By convention, debits are listed first and credits are indented below them. And there's one golden rule:

TOTAL DEBITS = TOTAL CREDITS   (in every single entry)

To write any entry, ask three questions in order:

1. Question 1Which accounts change?There are at least two. Paying rent affects Rent Expense and Cash.
2. Question 2What type is each, and does it go up or down?Rent Expense (an expense) goes up. Cash (an asset) goes down.
3. Question 3Debit or credit?An expense going up is a debit. An asset going down is a credit. Check that the two amounts match.

Brightside's first month as journal entries

Here are the transactions from lesson 1, now written the way a bookkeeper records them. To keep it simple we ignore sales tax for now; you'll see how to add it in a moment.

Total debits: $101,500. Total credits: $101,500. Every entry balances on its own, so the whole journal does too.

Reasoning through one entry

Take entry 3, the supplies bought on account, and run the three questions:

1. Which accounts change? Inventory and Accounts Payable.
2. What are they, and which way do they move? Inventory is an asset and goes up. Accounts Payable is a liability and goes up.
3. Debit or credit? An asset increases with a debit; a liability increases with a credit. Debit Inventory $6,000, credit Accounts Payable $6,000. Done.

Once entries 5 through 8 are recorded, you can see where each dollar of Brightside's $18,000 in sales went:

Of $18,000 in sales: cost of goods sold $5,000 (27.8%), wages $7,000 (38.9%), rent $3,500 (19.4%) and $2,500 left over (13.9%) before month-end depreciation.

Compound entries and sales tax

Many transactions touch more than two accounts. These are compound entries, and the golden rule still applies: the debits add up to the credits.

The most common example is sales tax. The U.S. has no federal sales tax or VAT; sales tax is set by states and local governments. Brightside is in Austin, where the combined rate is 8.25% (the Texas state rate of 6.25% plus the 2% local maximum). On a $1,000 catering order, the customer pays $1,082.50, but the $82.50 isn't Brightside's money. It collects it on behalf of the state:

Debits ($1,082.50) = credits ($1,000.00 + $82.50). Sales Tax Payable is a liability until Brightside files its return and pays the Texas Comptroller.

Unlike a VAT, U.S. sales tax doesn't give you a credit for the tax you pay on your own purchases. Goods bought for resale or as ingredients are usually bought tax-free with a resale certificate. Sales tax paid on things the business uses itself, like a new $2,000 grinder, is simply part of the cost: Brightside would debit Equipment for the full $2,165 ($2,000 plus 8.25%). Rules vary by state, so check with your state's tax agency; lesson 13 covers sales tax in depth.

Beginner mistakes to avoid

1) Accounts Payable              4,000
       Cash                              4,000
2) Accounts Receivable           1,200
       Catering Revenue                  1,200
3) Advertising Expense             250
       Cash                                250
4) Notes Payable                   400
   Interest Expense                 50
       Cash                                450
5) Owner's Draws                 1,500
       Cash                              1,500

Summary

• Debit is the left side of an account and credit is the right side; neither means good or bad.
• Draws, expenses and assets increase with debits; liabilities, equity and revenue increase with credits (DEALER).
• In every journal entry, total debits equal total credits.
• Compound entries touch three or more accounts, like a sale with sales tax or a loan payment with interest.
• Sales tax you collect is a liability to the state, never revenue.

Want more worked examples? Our article debits and credits explained walks through eight more transactions for a dog grooming business.

Next lesson: The Journal, the General Ledger and the Trial Balance. You'll post Brightside's entries to the ledger, add the first adjusting entry and prove that everything balances.