Debits and credits, finally¶
Every accounting system you'll ever touch, from a shoebox ledger to SAP, records changes in two columns called debit and credit. If you walk in assuming debit means "good" or "increase," you'll get half of every transaction backwards, because the words don't carry any of that meaning. They're directions, nothing more. Once you know which direction is "normal" for a given account, the rest is mechanical.
The T-account: left and right¶
A T-account is the simplest way to watch what's happening inside one account. Draw a big letter T, write the account's name across the top, and you've got two columns: the left side and the right side. That's it. Debit means left. Credit means right. Nothing about "up" or "down," nothing about good or bad, just position on the page.
A T-account for Cash
Say Cash starts the month at zero. The company deposits $500 from a sale and later pays $200 for supplies. Both changes get recorded in the same T-account, one on each side:
| Debit (left) | Credit (right) |
|---|---|
| 500 | |
| 200 |
The $500 sits on the left because it was entered as a debit. The $200 sits on the right because it was entered as a credit. Whether "debit" happened to mean an increase or a decrease here is a separate question, one the next section answers. (You'll see in a moment why the deposit had to go on the left and the payment on the right.)
Common mistake: assuming debit means increase
Debit does not mean increase. Credit does not mean decrease. They don't mean good or bad, either. Debit means left, and credit means right, full stop. An account can grow with a debit or shrink with a debit, depending entirely on which side is normal for that account. Treat "debit" and "credit" as compass directions, not verdicts, or you will get exactly half of every transaction wrong.
Normal balance: increase on your side, decrease on the other¶
Every account has a normal balance: the side where its balance normally sits, and the side where increases are recorded. Decreases always land on the opposite side. That's the entire rule. You don't have to guess or memorize it account by account, because it follows straight from the account's type.
| Type | Normal balance | Increase with | Decrease with |
|---|---|---|---|
| Asset | Debit | Debit | Credit |
| Liability | Credit | Credit | Debit |
| Stockholders' Equity | Credit | Credit | Debit |
| Revenue | Credit | Credit | Debit |
| Expense | Debit | Debit | Credit |
| Dividend | Debit | Debit | Credit |
Cash is an asset, so it increases with a debit and decreases with a credit, matching the $500 and $200 above. Accounts Payable is a liability, so it's the mirror image: a credit grows it, a debit shrinks it.
Why left and right match the equation¶
This isn't an arbitrary code. It comes straight from the equation you already know: Assets = Liabilities + Stockholders' Equity. Assets sit on the left of that equation, so they increase on the left side of their T-accounts, a debit. Liabilities and stockholders' equity sit on the right of the equation, so they increase on the right side of their T-accounts, a credit. Left stays left, right stays right.
Revenue and expenses just extend the equity side. Revenue increases stockholders' equity (it's profit the company earned), so it behaves like equity and increases with a credit. Expenses and dividends both shrink stockholders' equity, so they move the opposite way from equity itself: they increase with a debit, even though neither one is a liability. An expense debit doesn't mean "bad"; it means the account that tracks equity's decrease is growing.
Here's the reliable rule: the left side of the equation, assets, increases with a debit. The right side, liabilities and equity, increases with a credit. Expenses and dividends increase with a debit too, because they push equity down instead of up.
Pause and work¶
Start by sorting a small chart of accounts by type and normal balance, the skill you'll use for every company from here forward.
Now do it twice yourself, with a fresh set of accounts each time.
Next, practice turning a single line, one account, one direction, into a debit-or-credit call.
Here's a decrease to work through yourself; the account and the amount are filled in, you supply the side.
Once debit-or-credit calls feel automatic, the next section puts them to work in a full journal entry.