Double-entry accounting is a bookkeeping system where every financial transaction is recorded in two accounts: one as a debit entry and another as a credit entry. The core idea is that for every transaction, the total debits must always equal the total credits.
In simple terms:
• Debit: Money flowing into an account, or what you receive.
• Credit: Money flowing out of an account, or what you give.
For example:
If you buy office equipment worth $500 in cash:
• You record a debit entry of $500 in your Equipment account (because you now have more equipment).
• You record a credit entry of $500 in your Cash account (because cash has decreased).
Both sides match ($500 debit = $500 credit), keeping the books balanced.
This method helps prevent errors, makes financial statements accurate, and clearly shows how money moves through your business.
Hang on a secon, I thought when you credit an account you add money to it not decrease it? What's going on?
That’s a common source of confusion—let’s clarify it clearly:
In double-entry accounting, the words debit and credit don’t simply mean “add” or “subtract.” Instead, they reflect different meanings depending on the type of account involved. Let’s simplify this:
Accounts are divided into categories:
1. Asset Accounts
(Things your business owns, e.g., cash, inventory, equipment)
• Debit (+) means the asset increases
• Credit (–) means the asset decreases
Example: If your cash account receives money, you debit the cash account (increase). If you pay money out, you creditit (decrease).
2. Liability Accounts
(Money your business owes, e.g., loans, accounts payable)
• Debit (–) means liabilities decrease
• Credit (+) means liabilities increase
Example: Taking out a loan means your debt goes up, so you credit your liabilities. Paying off the loan reduces debt, so you debit liabilities.
3. Equity Accounts
(Owner’s claim in the business)
• Debit (–) means equity decreases
• Credit (+) means equity increases
Example: Owner investing more money into the business means equity increases, so you credit equity.
4. Revenue (Income) Accounts
(Money earned by your business, e.g., sales income)
• Debit (–) means revenue decreases
• Credit (+) means revenue increases
Example: You make a sale, revenue increases, so you credit your revenue account.
5. Expense Accounts
(Money spent on running your business, e.g., salaries, rent, supplies)
• Debit (+) means expenses increase
• Credit (–) means expenses decrease
Example: Paying rent increases your expenses, so you debit the expense account.
Why the confusion?
People commonly misunderstand because most are used to their bank statements, where a “credit” is money coming into their account. But a bank statement shows your account from the bank’s perspective, not yours.
• From the bank’s viewpoint:
• Your bank account is a liability (the bank owes you money). Thus, when the bank credits your account, it’s increasing its liability (it owes you more).
• When you deposit money, the bank credits your account because from their side, they now owe you more.
• From your viewpoint (your bookkeeping):
• Your bank account is an asset (you own the money).
• So, when your cash increases, you debit it in your books.
Quick memory trick:
• Debit (Dr) usually means:
• Increase in Assets or Expenses (A, E)
• Decrease in Liabilities, Equity, Revenue (L, E, R)
• Credit (Cr) usually means:
• Increase in Liabilities, Equity, Revenue (L, E, R)
• Decrease in Assets or Expenses (A, E)
Summary:
A “credit” doesn’t always mean adding or subtracting money. It depends on the type of account. The key is to remember that every entry always balances out: total debits = total credits.