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When to Use Debits vs. Credits in Accounting

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Mary Girsch-Bock
By: Mary Girsch-Bock
Mary Girsch-Bock
Mary Girsch-Bock
Mary Girsch-Bock studied accounting and business at UIC. After working as an accountant for many years in various industries, including healthcare and property management, she returned to her first love, writing. She specialized in accounting and business articles, with an emphasis on software reviews, which she wrote for more than 20 years. She continues to write for the first publication she ever wrote for, CPA Practice Advisor, while blogging for several software companies.

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Navigating the world of double-entry accounting requires a clear understanding of when to use debits and credits. These two fundamental elements are essential for maintaining accurate financial records. Whether you're a seasoned accountant or stepping into the role of bookkeeper for your business, mastering these concepts is crucial.

Debits and credits form the backbone of all accounting systems. Every transaction you record, whether in a traditional ledger or modern accounting software, must include both a debit and a credit entry. This balance is the cornerstone of keeping your financial data organized and reliable.

But the question remains: how do you determine when to debit an account and when to credit one? We’ll break down the basic rules of accounting to help you understand this process better and provide you with a handy reference chart to keep as a guide. This way, you can approach your accounting tasks with confidence and precision.

Top picks for accounting software

Below are some of our current favorite options for accounting software. These picks offer a combination of value and features we would want to see in a comprehensive accounting software option.

 

What are debits and credits?

As a business owner, you may find yourself struggling with when to use a debit and credit in accounting. You may even be wondering why they’re even necessary.

Debits and credits are used to ensure that you’re adhering to the accounting equation, which is:

Assets = Liabilities + Equity

In double-entry accounting, any transaction recorded involves at least two accounts, with one account debited while the other is credited. Debits are always on the left side of the entry, while credits are always on the right side, and your debits and credits should always equal each other in order for your accounts to remain in balance.

For instance, if we were to record a $250 payment received on account from a customer, the journal entry for debits and credits would look like this:

Date Account Debit Credit
2/28/2020 Cash $250
2/28/2020 Accounts Receivable $250

In this journal entry, cash is increased (debited) and accounts receivable credited (decreased).

Working from the rules established in the debits and credits chart below, we used a debit to record the money paid by your customer. A debit is always used to increase the balance of an asset account, and the cash account is an asset account. Since we deposited funds in the amount of $250, we increased the balance in the cash account with a debit of $250.

In the second part of the transaction, you'll want to credit your accounts receivable account because your customer paid their bill, an action that reduces the accounts receivable balance. Again, according to the chart below, when we want to decrease an asset account balance, we use a credit, which is why this transaction shows a credit of $250.

Account Type Increases Balance Decreases Balance
Assets: Assets are things you own such as cash, accounts receivable, bank accounts, furniture, and computers Debit Credit
Liabilities: Liabilities include things you owe such as accounts payable, notes payable, and bank loans Credit Debit
Revenue: Revenue is the money your business is paid for the sale of products and services Credit Debit
Expenses: Expenses are considered the cost of doing business and include things such as office supplies, insurance, rent, payroll expenses, and postage Debit Credit
Capital/Owner Equity: The Capital/Owner Equity account represents your financial interest in the business Credit Debit

Debit vs credit: What’s the difference?

Debits: A debit is an accounting transaction that increases either an asset account like cash or an expense account like utility expense. Debits are always entered on the left side of a journal entry.

Credits: A credit is an accounting transaction that increases a liability account such as loans payable, or an equity account such as capital. A credit is always entered on the right side of a journal entry.

If you’re unsure when to debit and when to credit an account, check out our t-chart below.

Debit and credit accounts

Account When to Debit When to Credit
Cash and bank accounts When depositing funds or a customer makes a payment When bills are paid
Accounts receivable When a sale is made on credit When the customer pays
Various expense accounts such as rent, utilities, payroll, and office supplies When a purchase is made or a bill paid When a refund is received
Accounts payable When a bill is paid When entering a bill for future payment
Revenue When a product is returned, or a discount is given When a sale is made

Examples of debits and credits in double-entry accounting

Here are a few examples of common journal entries made during the course of business.

Recording a sales transaction

Recording a sales transaction is more detailed than many other journal entries because you need to track cost of goods sold as well as any sales tax charged to your customer.

For example, on February 1, your company sells five leather journals at a cost of $20 each. After 7% sales tax, the customer is invoiced for $107.00. Here is how you would record these debits and credits in a journal entry:

Date Account Debit Credit
2-1-2020 Accounts Receivable $107
2-1-2020 Cost of Goods Sold $ 55
2-1-2020 Revenue $100
2-1-2020 Inventory $  55
2-1-2020 Sales Tax Payable $    7

You will increase (debit) your accounts receivable balance by the invoice total of $107, with the revenue recognized when the transaction takes place. Cost of goods sold is an expense account, which should also be increased (debited) by the amount the leather journals cost you.

Revenue will be increased (credited) by $100.

The inventory account, which is an asset account, is reduced (credited) by $55, since five journals were sold.

Finally, you will record any sales tax due as a credit, increasing the balance of that liability account.

Recording a business loan

On January 1, 2020, your business receives a loan in the amount of $25,000, with a 5% interest rate, paid annually. The note is due December 31, 2022. Here is how you record it:

Date Account Debit Credit
1-1-2020 Cash $25,000
1-1-2020 Notes Payable $25,000
1-1-2020 Interest Expense $625
1-1-2020 Interest Payable $625

Make a debit entry (increase) to cash, while crediting the loan as notes or loans payable. You will also need to record the interest expense for the year.

When you pay the interest in December, you would debit the interest payable account and credit the cash account.

Recording a bill in accounts payable

When you receive a bill from a supplier or a utility company, you'll enter it into accounts payable, since the bill will be paid in the near future. The entry would look like this:

Date Account Debit Credit
2-1-2020 Utility Expense $203
2-1-2020 Accounts Payable $203

You would debit (increase) your utility expense account, while also crediting (increasing) your accounts payable account.

Recording payment of a bill

When you pay the utility bill the following month, the entry would look like this:

Date Account Debit Credit
2-28-2020 Accounts Payable $203
2-28-2020 Cash $203

You would debit (reduce) accounts payable, since you’re paying the bill. You would also credit (reduce) cash.

Best accounting software to track debits and credits

Navigating the world of accounting can be daunting, especially when it comes to the meticulous task of tracking debits and credits. The right accounting software not only simplifies this process but also ensures accuracy and provides valuable insights into your financial health. In this section, we'll explore three top-tier accounting software options—FreshBooks, QuickBooks Online, and Zoho Books—each selected for their robust capabilities and user-friendly interfaces that cater to a variety of business needs.

FreshBooks

FreshBooks stands out for its exceptional ease of use and client management features, making it a favorite among freelancers and service-based businesses.

From firsthand experience, the simplicity of setting up and navigating FreshBooks is noteworthy. It allows for effortless tracking of billable time and expenses, and converts these into professional invoices with a few clicks. FreshBooks handles debits and credits seamlessly within its double-entry accounting, providing automatic checks and balances that ensure your books are always accurate and up-to-date.

FreshBooks
FreshBooks
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Quickbooks Online

A giant in the accounting software world, QuickBooks Online is renowned for its comprehensive features that cater to small and medium-sized businesses across various industries.

This platform excels in offering detailed financial tracking and reporting capabilities. Users can easily monitor debits and credits, manage payroll, and even track inventory. The ability to connect to a multitude of banks and integrate with hundreds of apps makes QuickBooks Online a versatile tool, ensuring all financial data is synchronized and manageable from a single dashboard.

QuickBooks Online
QuickBooks Online
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Zoho Books

Zoho Books is a superb option for growing businesses that need scalable software. It is part of the larger suite of Zoho applications, which means it integrates beautifully with other Zoho products, providing a cohesive business management experience.

What makes Zoho Books particularly appealing is its automation features—automatic bank feeds, reconciliation, and custom workflows reduce manual entry and the possibility of errors. For businesses looking to expand globally, Zoho Books supports multiple currencies and is compliant with various international tax regulations, making it an excellent choice for managing debits and credits on a global scale.

Zoho Books
Zoho Books
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Debits vs. credits: A final word

Whether you’re creating a business budget or tracking your accounts receivable turnover, you need to use debits and credits properly.

In fact, the accuracy of everything from your net income to your accounting ratios depends on properly entering debits and credits. Taking the time to understand them now will save you a lot of time and extra work down the road.

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