What are debits and credits?
In [double-entry bookkeeping](/glossary/double-entry-bookkeeping), every transaction is recorded as at least one debit (Dr) and one credit (Cr) of equal value. They are not "good" or "bad"; they are simply the left and right sides of an account (often drawn as a T-account).
The rules
- Assets: debit increases, credit decreases
- Expenses: debit increases, credit decreases
- Liabilities: credit increases, debit decreases
- Equity: credit increases, debit decreases
- Income/revenue: credit increases, debit decreases
A common memory aid is DEAD CLIC: Debits increase Expenses, Assets and Drawings; Credits increase Liabilities, Income and Capital.
Examples
- Pay rent of $2,000: debit rent expense, credit bank.
- Take a $10,000 loan: debit bank, credit loan payable.
- Make a $500 cash sale: debit cash, credit sales.
- Buy stock on credit for $800: debit inventory, credit [accounts payable](/glossary/accounts-payable).
Why "credit" on a bank statement?
Your bank statement is written from the bank's point of view. Your deposit is a liability for the bank, so it shows as a credit, while in your own books it's a debit to your bank account.
Why it matters
Understanding debits and credits lets you read a [general ledger](/glossary/general-ledger), post [journal entries](/glossary/journal-entry) and fix errors in a [trial balance](/glossary/trial-balance).