Debits and credits explained for small business owners
A debit and a credit are the two sides of every accounting entry. Which side increases an account depends on what kind of account it is, and once you know the five account types the rest is a pattern you can follow.
In short
- Debit means the left side of an account and credit means the right side. Neither means good or bad.
- Assets and expenses increase with a debit. Liabilities, equity and income increase with a credit.
- Every transaction has equal debits and credits. If the two totals differ, something is wrong.
- Your bank statement is written from the bank's point of view, so a deposit that you debit in your books is a credit on the statement.
The five account types
Every account in your books is one of five types. Debits and credits move each type in a fixed direction.
| Account type | Example | Increases with | Decreases with |
|---|---|---|---|
| Asset | Bank, stock, equipment, money customers owe you | Debit | Credit |
| Liability | Loans, supplier balances, VAT owed to SARS | Credit | Debit |
| Equity | Money you put in, profit kept in the business | Credit | Debit |
| Income | Sales, fees | Credit | Debit |
| Expense | Rent, wages, fuel, stock used | Debit | Credit |
The South African Revenue Service is abbreviated to SARS throughout this guide.
One rule that never changes
Every transaction has debits and credits of the same total. That is why a list of all your account balances, called a trial balance, always adds up when the books are right. If it does not, there is an error to find.
Worked examples
You pay R4,000 rent from the bank. Rent is an expense, so it goes up with a debit. The bank is an asset, so it goes down with a credit.
| Account | Debit | Credit |
|---|---|---|
| Rent | R4,000 | |
| Bank | R4,000 |
You invoice a customer R5,750 including 15% VAT, not yet paid. The customer's debt is an asset. Sales is income. VAT collected is money you owe SARS.
| Account | Debit | Credit |
|---|---|---|
| Debtors (money owed to you) | R5,750 | |
| Sales | R5,000 | |
| VAT output | R750 |
The customer pays. Cash comes in and the debt goes down.
| Account | Debit | Credit |
|---|---|---|
| Bank | R5,750 | |
| Debtors | R5,750 |
You take a R50,000 loan into the bank. Cash is an asset and the loan is a liability.
| Account | Debit | Credit |
|---|---|---|
| Bank | R50,000 | |
| Loan | R50,000 |
Why your bank statement looks backwards
Your bank statement is the bank's record of what it owes you. When you deposit money, the bank owes you more, so it records a credit. In your books the same deposit increases your asset, so you record a debit. It is the same event seen from two sides.
What to do now
- Write the five account types on a card and keep it next to your books until the pattern is automatic.
- Pick three of your own transactions from last month and write the debit and credit for each.
- Check that your trial balance adds up if your software produces one.
- Do not force the numbers. If your books do not balance, find the difference. A bookkeeper can trace it quickly.
Frequently asked questions
Does a debit mean money goes out?
No. A debit increases an asset or an expense, so depositing cash is a debit to your bank account.
Is a credit always good?
No. A credit increases income, but it also increases what you owe, such as a loan.
Do I need to know this if I use accounting software?
Software does the entries for you, but knowing the logic helps you spot when a transaction has been coded to the wrong account.
Sources and further reading
This article is general information for South African businesses. It is not tax, legal or financial advice, and it reflects the rules and figures at the date shown above. Tax rules change, so confirm the current position before you act. TBL's practitioners are registered tax practitioners.