Forget what your bank says
When your bank credits your account, your balance goes up. That makes people assume a credit is always good. In bookkeeping it is not. A debit is just an entry on the left, and a credit is an entry on the right. Whether that raises or lowers an account depends on the account type.
The bank describes things from its own point of view. Your deposit is a liability for the bank, so a credit increases it. Your books are from your point of view, where cash is an asset and a deposit is a debit.
The five account types and their normal side
Think of five buckets. Assets and expenses normally carry debit balances, so a debit increases them. Liabilities, equity and income normally carry credit balances, so a credit increases them. The opposite entry decreases each one.
A common memory aid is the word DEAD CLIC. Debits increase Expenses, Assets and Dividends or draws. Credits increase Liabilities, Income and Capital. It is a little silly, but it sticks, and it covers nearly every case a small business will meet.
Common transactions as debit and credit pairs
Paying rent from the bank: debit rent expense, credit the bank account. Receiving payment from a customer for an invoice: debit the bank, credit accounts receivable. Buying equipment with cash: debit equipment, credit the bank.
Taking out a loan: debit the bank because cash rose, credit the loan liability. Making a loan payment: debit the loan liability for the principal portion, debit interest expense for the interest, and credit the bank for the total. Owner puts personal money in: debit the bank, credit owner contributions.
Notice that in each pair one side is the thing that received value and the other is the source. If you can say what received and what gave, the debit is the receiver.
What a negative balance can tell you
When an account ends up on the wrong side, it is a clue. An asset account with a credit balance, like a bank account showing negative, suggests an overdraft or a missing deposit. An expense account with a credit balance suggests a refund was posted larger than the original charge.
Learning the normal side of each account lets you scan a trial balance and spot oddities within minutes. Income showing a debit balance, or a loan showing a debit balance, deserve a closer look.
Tips for using this day to day
Do not try to memorize every case. Pick the five account types, remember where each grows, and work out the rest. If you are still unsure when posting a manual entry, write it on paper first and check that total debits equal total credits.
If a transaction feels strange, such as a customer overpayment or a returned check, ask your bookkeeper rather than guessing. A wrong pair of sides can sit unnoticed for months and distort your reports.
A quick self-test
Try three on your own. You pay a utility bill from the bank. You sell a product for cash. You receive a vendor bill you will pay next week. The answers: debit utilities and credit the bank; debit the bank and credit sales; debit the expense and credit accounts payable. If you got them, you understand the system well enough to read most reports.
Common questions
Does debit always mean money out?
No. A debit increases assets and expenses and decreases liabilities, equity and income. Whether cash moves out depends on which accounts are involved.
Why does software hide debits and credits?
Most screens use words like deposit, bill and payment. The program creates the correct debit and credit pair in the background. You only see them in manual journal entries and some reports.
Which side is a sale on?
Income is a credit. If the sale is on account, the other side is a debit to accounts receivable. If it is paid immediately, the debit goes to cash or the bank.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.
