Debit and Credit: Definition and Importance
Learn how debits and credits form the foundation of double-entry accounting and how software like Eleven can help manage them for efficient, error-free bookkeeping.
What are Debit and Credit?
In accounting, debits (DR) and credits (CR) are simply the two sides of every financial transaction, used to keep the accounting system in balance.
Debit increases assets or expenses and decreases liabilities or equity.
On the other hand, credit increases liabilities, equity, or revenue and decreases assets or expenses.
A debit is recorded on the left side of an account, while a credit is recorded on the right. These terms don’t mean “increase” or “decrease” on their own; their effect depends on the type of account involved.
Assets and expenses grow when they are debited and shrink when they are credited, while liabilities, equity, and revenue increase when credited and decrease when debited.
For example, if a business buys a computer with cash, the equipment account is debited because the asset is increasing, and the cash account is credited because that asset is decreasing. Every transaction must have equal debits and credits to maintain balance in the books.
Debit vs Credit
Debits and credits can be broken down by looking at how they function within different categories of accounts.
Assets and expenses increase when debited because they represent value coming into the business or costs being incurred.
A company that receives cash, purchases equipment, or pays for services, records these increases as debits. When those same accounts decrease, such as spending cash or using up supplies, the reduction is recorded as a credit.
Liabilities, equity, and revenue behave in the opposite way. These accounts increase when credited because they represent obligations the business owes, value belonging to the owner, or income earned.
When a business takes out a loan, issues shares, or earns revenue from sales, the rise in these accounts is shown with a credit entry. If any of these accounts decrease, a debit is used instead, such as when a portion of a loan is repaid or when owner withdrawals reduce equity.
Every financial transaction must include at least one debit and one credit, and the total amount on each side must match.
Why are credits and debits important?
Debits and credits are essential because they are the system that keeps financial records accurate, balanced, and meaningful.
In double-entry accounting, every transaction affects at least two accounts, and debits and credits show exactly how those accounts change. This structure prevents errors by ensuring that the total value of debits always equals the total value of credits, which keeps the accounting equation intact.
Without debits and credits, it would be far more difficult to track where money is coming from, where it’s going, and how each activity affects a business’s overall financial position.
They also allow the creation of reliable financial statements, such as balance sheets and income statements, because all transactions are recorded in a consistent and balanced way.
