Debits and credits explained: which side is which

An account is the record of one thing: the bank, a van, sales, rent. Every account has two sides.

Debit is the left side. Credit is the right side. That is all the two words mean.

Neither word means good or bad, and neither means money in or money out. Which side makes an account go up depends on what kind of account it is.

Every transaction is posted twice: once on the debit side of one account, and once on the credit side of another. The two amounts always match. That is double entry.

The word credit has a second use. On credit means the goods change hands now and the money follows later.

Every account is one of five kinds. Learn what each kind is first, because the side follows from the kind.

Asset

Something the business owns, or is owed: money in the bank, a van, money that customers owe. It goes up on the debit side.

Expense

A cost of running the business, such as rent, wages or goods bought to sell. It goes up on the debit side.

Liability

Money the business owes to someone else, such as a bank loan or an unpaid supplier bill. It goes up on the credit side.

Capital

What the business owes its owner: the money the owner put in, plus any profit left in the business. It goes up on the credit side.

Income

What the business earns, mostly from sales. It goes up on the credit side.

To make an account go down, post to the opposite side.

Two names come up in every set of books. Money that customers owe is called trade receivables, and it is an asset. Money owed to suppliers is called trade payables, and it is a liability.

Work through the same steps for every transaction. The side is the last thing you decide, not the first.

1. Find the two accounts the transaction touches. Paying rent from the bank touches Rent and Bank.
2. Decide what kind of account each one is. Rent is an expense. Bank is an asset.
3. Decide whether each account goes up or down. There is more rent cost, and less money in the bank.
4. Pick the side for each. An expense goes up on the debit side, so Rent is debited. An asset goes down on the credit side, so Bank is credited.
5. Post the same amount to both accounts: one debit and one credit.

When money comes in, Bank is debited, and the other account says where the money came from. When money goes out, Bank is credited, and the other account says what it was spent on.

Pinecroft Framing frames pictures and sells ready-made frames. In its first week six things happen.

Take the first line. Bank is an asset and it went up, so it is debited with £3,200.00. The business now owes its owner more, so Capital is credited with the same amount.

The sale on credit is recorded when it is made, not when the money arrives. The gallery owes £520.00, so Trade receivables, an asset, is debited. Sales is income, so it is credited.

Nothing touches Bank when the frames are bought on credit. Purchases, an expense, is debited with £290.00. Trade payables, a liability, is credited.

When the gallery pays £200.00, Bank goes up and Trade receivables goes down. The gallery still owes £320.00.

Bank has debits of £3,400.00 and credits of £1,225.00, so it holds £2,175.00. Across all six lines the debits come to £5,435.00, and so do the credits.

• Reading debit as money out and credit as money in. In your own books, money coming into Bank is a debit, because Bank is an asset.
• Copying the bank statement. A statement is written from the bank's side, so money in your account shows there as a credit. In your own books the same money is a debit balance on Bank.
• Picking the side before the kind of account. Decide the kind first, then whether it goes up or down, then the side.
• Crediting Bank for something bought on credit. Nothing touches Bank until the supplier is paid. The credit goes to Trade payables.
• Waiting for the money before recording a sale on credit. The sale is recorded when it is made.
• Treating money the owner pays in as income. It is capital.
• Posting only debits, or only credits, for one transaction. Every entry needs both, and the debits must equal the credits.

• In every entry the debits equal the credits.
• You can say what kind each account is, and why it went up or down.
• Each balance sits on the side its kind goes up on: a debit balance on an asset or an expense, a credit balance on a liability, capital or income.
• When every balance is listed in a trial balance, the debit column and the credit column add up to the same total.

An agreed trial balance proves only that the debits equal the credits. A posting to the wrong account still balances, so check the kind of each account as you go.