Accounting Basics: Debits and Credits Simplified for Beginners

2025-06-05 by Dan

Understanding debits and credits can be one of the most intimidating aspects of accounting for beginners. The terminology itself seems designed to confuse, and traditional explanations often leave newcomers more bewildered than enlightened. This guide breaks down these core accounting concepts in plain language, helping you build a solid foundation for your financial management journey.

Part of our Accounting Series: This article complements our guides on Manual Bookkeeping, Formal Accounting Systems, and Digital Spreadsheet Transition.

Why Accounting Terminology Is So Confusing

Before diving into the cheatsheet, it's worth acknowledging why accounting terms like "debit" and "credit" seem counterintuitive. The confusion often stems from:

Banking vs. Accounting Usage: In everyday banking, "credit" means adding money to your account, while "debit" means taking money out. In accounting, these terms refer to which side of the account is affected, not necessarily whether money is being added or removed.
Historical Origins: Double-entry bookkeeping dates back to 15th century Italy, and much of the terminology remains unchanged despite evolving business practices.
Perspective Shift: Accounting views transactions from the business's perspective, not the individual's perspective, creating a mental disconnect.

But don't worry—once you grasp a few key concepts, the system is remarkably logical and consistent.

The Beginner-Friendly Accounting Cheatsheet

Section 1: The Simple Foundation - A Balance Scale

Think of accounting like a balance scale that must always stay level:

WHAT YOU HAVE = WHERE IT CAME FROM

(Assets) = (Liabilities + Equity)

The Golden Rule: Every financial transaction affects at least two accounts, keeping the scale balanced.

The accounting equation visualized as a balance scale

Section 2: Account Types in Plain English

Account Type	What It Means	Think of It As	Normal Balance
Assets	Things you own or control	Your "stuff" and money	Debit (left side)
Liabilities	Things you owe to others	Your "IOUs"	Credit (right side)
Equity	The owner's stake in the business	Your "net worth"	Credit (right side)
Revenue	Money earned from your activities	Money coming in	Credit (right side)
Expenses	Costs of running your business	Money going out	Debit (left side)

Section 3: When to Debit or Credit (Made Simple)

For Assets (things you own)

To INCREASE: Use a DEBIT (think "Deposit")
To DECREASE: Use a CREDIT (think "Cash out")

For Expenses (costs of business)

To INCREASE: Use a DEBIT (think "Dollars spent")
To DECREASE: Use a CREDIT (think "Cut back")

For Liabilities and Equity (money sources)

To INCREASE: Use a CREDIT (think "Create")
To DECREASE: Use a DEBIT (think "Diminish")

For Revenue (money earned)

To INCREASE: Use a CREDIT (think "Collected")
To DECREASE: Use a DEBIT (think "Didn't keep")

Section 4: Everyday Transactions in Plain Language

When a Customer Pays You

DEBIT: Bank Account (your money increases)
CREDIT: Sales/Service Revenue (you earned money)

When You Pay Rent

DEBIT: Rent Expense (you spent money on rent)
CREDIT: Bank Account (your money decreases)

When You Buy Something on Credit

DEBIT: The Item You Bought (your stuff increases)
CREDIT: Accounts Payable (your IOUs increase)

When You Put Your Own Money into the Business

DEBIT: Bank Account (business money increases)
CREDIT: Owner's Investment (owner's stake increases)

When You Pay an Employee

DEBIT: Wage Expense (you spent money on wages)
CREDIT: Bank Account (your money decreases)

When a Customer Pays an Invoice

DEBIT: Bank Account (your money increases)
CREDIT: Accounts Receivable (they owe you less)

Section 5: Visual Helpers

The Money Flow Method

Money coming IN to an account = DEBIT
Money going OUT of an account = CREDIT

The "DEAD" Rule for account types

Debit increases:

Drawings (owner withdrawals)
Expenses
Assets
Debit balances (like some contra accounts)

Credit increases everything else

The Right-Left Rule

MONEY/STUFF           |      MONEY SOURCES
(Assets/Expenses)     |    (Liabilities/Equity/Revenue)
----------------------|--------------------------------
LEFT SIDE (DEBIT)     |      RIGHT SIDE (CREDIT)
(Increases here)      |      (Increases here)

This visual representation helps remember which side increases which account types.

Section 6: Common Accounts in Plain English

Asset Accounts (Stuff You Have)

Cash (money in the bank or on hand)
Money people owe you (Accounts Receivable)
Inventory (stuff you plan to sell)
Prepaid expenses (things you paid for in advance)
Equipment and furniture
Buildings and land

Liability Accounts (Stuff You Owe)

Money you owe suppliers (Accounts Payable)
Loans from banks
Taxes you need to pay
Money collected for services not yet provided

Equity Accounts (Owner's Stake)

Money the owner put in
Profits kept in the business
Money the owner took out (draws)

Revenue Accounts (Money You Earned)

Sales of products
Services performed
Interest earned
Rental income

Expense Accounts (Money You Spent)

Cost of products sold
Employee pay
Rent for your space
Utilities (electricity, water)
Insurance
Wear and tear on equipment (depreciation)

Section 7: Mistakes to Watch For

Common Beginner Errors

Confusing your personal money with business money
Recording only one side of a transaction
Mixing up which accounts increase with debits vs. credits
Not recording transactions promptly
Forgetting to include receipts or documentation

Quick Sanity Checks

Does your transaction affect at least two accounts?
Does the transaction keep your accounting equation balanced?
If you're increasing an asset, are you either decreasing another asset or increasing a liability/equity?
Do your debits equal your credits for each transaction?

Putting It All Together: A Simple Example

Let's walk through a month of transactions for a small consulting business to see how debits and credits work in practice. For each transaction, we'll break down exactly which accounts are affected and why:

Example: Sarah's Consulting - June 2025

Transaction 1: June 1 - Sarah invests $5,000 to start her business

Account	Account Type	Debit	Credit	Explanation
Bank Account	Asset	$5,000		Assets increase with a debit. The business received cash.
Owner's Capital	Equity		$5,000	Equity increases with a credit. The owner's stake in the business increased.

Transaction 2: June 5 - Buys a computer for $1,200

Account	Account Type	Debit	Credit	Explanation
Computer Equipment	Asset	$1,200		Assets increase with a debit. Business obtained a new computer.
Bank Account	Asset		$1,200	Assets decrease with a credit. Cash was paid out.

Transaction 3: June 10 - Gets a $500 advance from a client

Account	Account Type	Debit	Credit	Explanation
Bank Account	Asset	$500		Assets increase with a debit. Cash was received.
Unearned Revenue	Liability		$500	Liabilities increase with a credit. Sarah now owes service to the client.

Transaction 4: June 15 - Completes work for the client who paid the advance

Account	Account Type	Debit	Credit	Explanation
Unearned Revenue	Liability	$500		Liabilities decrease with a debit. Sarah no longer owes service to the client.
Service Revenue	Revenue		$500	Revenue increases with a credit. Sarah earned the money by providing service.

Transaction 5: June 20 - Completes $1,500 project and sends invoice (payment due next month)

Account	Account Type	Debit	Credit	Explanation
Accounts Receivable	Asset	$1,500		Assets increase with a debit. Client now owes Sarah money.
Service Revenue	Revenue		$1,500	Revenue increases with a credit. Sarah earned money by providing service.

Transaction 6: June 25 - Pays $800 for office rent

Account	Account Type	Debit	Credit	Explanation
Rent Expense	Expense	$800		Expenses increase with a debit. Sarah incurred a cost for rent.
Bank Account	Asset		$800	Assets decrease with a credit. Cash was paid out.

Transaction 7: June 30 - Sarah withdraws $1,000 for personal use

Account	Account Type	Debit	Credit	Explanation
Owner's Drawing	Equity (contra)	$1,000		Drawings increase with a debit. This reduces the owner's stake in the business.
Bank Account	Asset		$1,000	Assets decrease with a credit. Cash was paid out to the owner.

Final Account Balances at Month End

Assets

Bank Account $3,500
Computer Equipment $1,200
Accounts Receivable $1,500
Total Assets $6,200

Liabilities

Unearned Revenue $0
Total Liabilities $0

Equity

Owner's Capital $5,000
Owner's Drawing ($1,000)
Service Revenue $2,000
Rent Expense ($800)
Total Equity $5,200

The Accounting Equation Balances!

Assets ($6,200) = Liabilities ($0) + Equity ($5,200)

Note: Revenue and expenses are technically temporary equity accounts that will be closed to retained earnings at year-end, which is why they're shown under the equity section here.

From Understanding to Application: Next Steps

Now that you understand the basics of debits and credits, you're ready to apply this knowledge in a practical bookkeeping system. Here are your next steps:

For Beginners

Start with our guide to Manual Bookkeeping with a Columnar Pad to build a solid foundation with tangible paper records.

For Intermediate Users

Progress to Building a Formal Accounting System with Columnar Pads to implement double-entry bookkeeping properly.

For Advanced Users

Move your system to digital with our guide to Transitioning from Paper Accounting to Digital Spreadsheets.

Recommended Resources for Further Learning

Video Tutorials

Books for Beginners

"Accounting Made Simple" by Mike Piper
"Bookkeeping All-In-One For Dummies" by Lita Epstein
"The Accounting Game: Basic Accounting Fresh from the Lemonade Stand" by Darrell Mullis and Judith Orloff

Conclusion

Accounting terminology doesn't have to be a barrier to understanding your finances. By translating debits and credits into plain language and focusing on the practical applications, you can quickly develop the confidence to maintain accurate financial records.

Remember that accounting is ultimately a story about your business told through numbers. Debits and credits are simply the grammar that helps you tell that story clearly and consistently. With practice, these concepts will become second nature, providing you with valuable insights into your financial health and supporting better business decisions.

Pro Tip: Print out this cheatsheet and keep it handy as you record your first few weeks of transactions. Reference it whenever you're unsure about which accounts to debit or credit, and you'll quickly internalize these fundamental accounting concepts.