Debit and credit are accounting terms representing opposite sides of a transaction: debits increase assets or expenses, while credits increase liabilities or equity. Together they form the double-entry bookkeeping system.
Every financial transaction affects at least two accounts. For example, if you buy $100 of supplies:
This keeps the accounting equation (Assets = Liabilities + Equity) balanced.
Accounts fall into five categories, each affected differently by debits and credits:
| Account Type | Normal Balance | Effect of Debit | Effect of Credit |
|---|---|---|---|
| Asset | Debit | Increase | Decrease |
| Liability | Credit | Decrease | Increase |
| Equity | Credit | Decrease | Increase |
| Revenue | Credit | Decrease | Increase |
| Expense | Debit | Increase | Decrease |
People often confuse debits and credits with positive/negative balances. A debit isn't always bad, nor is a credit always good. For example:
Context determines whether debits or credits are favorable.
When you pay off part of your mortgage:
This reduces both your liability and available cash, maintaining balance.