Small Business Accountants

Small Business Guide to Debits and Credits

Debits and credits are the two sides of every accounting transaction in double-entry bookkeeping. A debit increases assets and expenses and decreases liabilities, equity, and income, while a credit does the opposite. Every transaction must have equal debits and credits, which is how the trial balance stays in balance and lets the business produce accurate financial statements.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 4

Key takeaways

Double-entry bookkeeping records every business transaction twice, once as a debit and once as a credit, so that total debits always equal total credits.
Debits increase asset and expense accounts and decrease liability, equity, and income accounts; credits do the reverse.
The accounting equation, assets equal liabilities plus equity, is the foundation for deciding whether each account goes up or down with a debit or a credit.
A trial balance lists all ledger account balances and is used to confirm the total debits and total credits are equal before preparing the financial statements.
Modern UK accounting software such as Xero, FreeAgent, and QuickBooks handles the debit and credit posting automatically, but understanding the logic helps with spotting errors and reviewing journals.

Debits & credits explained

As a <a href="https://goforma.com/self-employed" target="_blank">self-employed person</a> or small business owner, getting a good grasp of <a href="https://goforma.com/small-business-accounting" target="_blank">accounting fundamentals</a> can feel like an uphill task. As <a href="https://www.goforma.com/packages/accountants-for-small-business-startups" target="_blank">accountants who specialise in small business needs</a>, we're familiar with the challenges that you face-and have put together a series of articles to help you easily understand the basics of accounting. We've touched on <a href="https://www.goforma.com/small-business-accounting/31-accounting-terms-concepts-you-need-to-know" target="_blank">key accounting terms & concepts</a> and the <a href="https://www.goforma.com/small-business-accounting/bookkeeping-vs-accounting-differences" target="_blank">differences between bookkeeping and accounting</a>. Below, we'll dive in to explain what debits and credits mean in accounting.

What are debits and credits?

When accounting for business transactions, the numbers are recorded in two accounts - the debit column on the left side, and the credit column on the right.

Debit (DR): An accounting entry that either increases an asset or expense account, or decreases a liability or equity account.
Credit (CR): An accounting entry that either increases a liability or equity account, or decreases an asset or expense account.

Why are debits and credits important?

Most businesses use double-entry bookkeeping to keep track of their transactions, and this requires a recording system using debits and credits.

When a transaction is recorded, a minimum of two accounts are impacted. A debit entry will be recorded against one account, while a credit entry will be recorded against another account. When the debits and credits for each accounting transaction are totaled up, these amounts need to be equal, in order for the transaction to be considered as “balanced”.

Here’s an example: the purchase of an office desk for £250 will be recorded as a debit entry (left side) in your asset account, as this represents an increase in your assets. Every debit has a corresponding credit, and in this case, you’ll record a credit entry (right side) of £250 in your bank account to reflect the outflow of cash for the purchase.

Debit and credit accounts

In the example above, we’ve outlined how debits and credits are recorded for asset accounts. Other common accounts include the expenses, liabilities, owner’s equity and revenue accounts - and we’ll dive into an example for each below:

Liability

In liability accounts, debits represent a decrease, while credits represent an increase.

If you’ve owed a vendor £500, and the payment is now due, transactions will be recorded in your accounts payable and cash accounts. The cash account will be debited to reflect a cash outflow (to pay off the debt), while the accounts payable will be debited to reflect a decrease in debt (from having paid off the bill). ‍

Owner’s Equity‍

When it comes to recording journal entries, owner’s equity accounts are treated in the same manner as liability accounts. Debits represent a decrease, while credits represent an increase.

Let’s say you’ve decided to invest an additional £15,000 into your business. This will impact your cash and owner’s equity accounts; the former will be debited to reflect an increase in assets, while the latter will be credited to represent the increase in your capital contribution.

Expense

An increase in an expense account is recorded as a debit, while a decrease is recorded as a credit entry.

If you’ve purchased office supplies for £100 using cash, your expense account will be debited to reflect the increase in expenses. You’ll then credit your cash account to reflect the outflow of cash for the purchase.

Revenue

For revenue accounts, increases are recorded as credit entries, while decreases are reflected as debit entries. If your business made cash sales of £2,000 in a given day, entries will be made in both the sales revenue and cash accounts.

There will be a credit entry of £2,000 in your sales revenue account, while a debit entry of £2,000 will be recorded in your cash account to reflect the inflow of cash (increase in asset).

Frequently asked questions

What are debits and credits in bookkeeping?

In double-entry bookkeeping, every transaction is recorded in two accounts: one with a debit entry and one with a credit entry of the same amount. The terms come from Latin and do not mean good or bad. A debit sits on the left of a T-account, a credit on the right. Debits increase assets and expenses and reduce liabilities, equity, and income; credits do the opposite.

Why must debits always equal credits?

Debits must equal credits because every transaction reflects an exchange: something the business receives and something it gives up. If the business buys stock for cash, stock goes up (debit) and cash goes down (credit) by the same amount. Keeping them in balance means the accounting equation (assets equal liabilities plus equity) always holds true, and the trial balance will come out right at the end of the period.

Which accounts are debited and which are credited?

Assets and expenses increase with debits and decrease with credits. Liabilities, equity, and income accounts behave in the opposite way, increasing with credits and decreasing with debits. For example, a sale increases both cash or accounts receivable (debit) and sales income (credit). Paying a supplier reduces cash (credit) and reduces the trade payable balance (debit). Bookkeepers memorise these rules or rely on software to apply them automatically.

What is a T-account?

A T-account is a simplified ledger format shaped like the letter T. The account name sits on top, debits are recorded on the left side of the vertical line, and credits on the right. It is the classic way of teaching and reasoning about double-entry bookkeeping. Modern UK accounting software no longer uses literal T-accounts, but the underlying logic of left-debit and right-credit still drives every journal entry.

How does a trial balance use debits and credits?

A trial balance lists every account in the general ledger together with its closing balance in a debit or credit column. If double-entry has been applied correctly throughout the period, the total of the debit column equals the total of the credit column. A mismatch points to a bookkeeping error somewhere in the ledger. The trial balance is the starting point for preparing the statutory profit and loss statement and balance sheet.

Do I need to understand debits and credits if I use accounting software?

Modern UK accounting software handles the mechanical debit and credit posting automatically. Directors and business owners do not need to post journals manually for day-to-day bookkeeping. Understanding the logic still helps when reviewing unusual transactions, correcting errors, posting year-end adjustments like depreciation or accruals, or asking an accountant the right questions. It also makes the statutory accounts easier to interpret once they are produced.

Can a single transaction have more than two entries?

Yes. A single business event can generate a compound journal with multiple debits and multiple credits, as long as the total debits still equal the total credits. A payroll run, for example, usually debits the wages expense and credits several liability accounts: PAYE to HMRC, employer National Insurance, pension contributions, and the employee's net pay. Accounting software posts compound journals as a single balanced entry.