Debits and Credits: A Cheat Sheet for Small Business Owners

Quick answer: Debits and credits are the two sides of every accounting entry. A debit is recorded on the left and a credit on the right. Debits increase assets, expenses and owner's draws; credits increase liabilities, equity and revenue. Every transaction must have equal total debits and credits, which keeps the books balanced.

Debits and credits confuse almost everyone at first, mainly because the words mean something different on your bank statement than in your own books. This guide gives you a debit vs credit accounting cheat sheet you can keep beside your desk, explains the logic so you do not have to memorize it, and walks through the full life of an invoice as journal entries that balance. The rules all come from the accounting equation, so start there if you want the foundation first.

On scope: our free invoice generator creates PDF invoices in your browser. It does not post journal entries, so you will record each invoice in your bookkeeping software or spreadsheet using the rules below.

What are debits and credits?

In double-entry bookkeeping, each account has two sides. The left side is the debit side and the right side is the credit side. These terms come from long-standing bookkeeping convention and simply mean left and right. They do not mean "money in" or "money out", and they are not good or bad.

The IRS describes this clearly in Publication 583, Starting a Business and Keeping Records: in the double-entry system, each account has a left side for debits and a right side for credits, and total debits must equal total credits after journal entries are posted to the ledger. That self-balancing feature is what makes double-entry books more reliable than a simple list of income and expenses. Our guide to double-entry bookkeeping covers the system in full.

Why debits increase some accounts and decrease others

The logic follows the accounting equation: Assets = Liabilities + Equity. Assets sit on the left of the equation, so they increase on the left (debit) side. Liabilities and equity sit on the right, so they increase on the right (credit) side.

Revenue and expenses are sub-parts of equity. Revenue increases equity, so it behaves like equity and increases with credits. Expenses reduce equity, so they behave the opposite way and increase with debits. Owner's draws and dividends also reduce equity, so they increase with debits too.

Debit vs credit accounting cheat sheet

This table is the whole system on one screen. The "normal balance" is the side on which the account usually carries its balance, which is also the side that increases it.

Account type	Normal balance	A debit will	A credit will	Small business examples
Assets	Debit	Increase	Decrease	Cash, accounts receivable, equipment, inventory, prepaid expenses
Expenses	Debit	Increase	Decrease	Rent, software, contractor costs, merchant fees, cost of goods sold
Owner's draws or dividends	Debit	Increase	Decrease	Transfers from the business to the owner
Liabilities	Credit	Decrease	Increase	Accounts payable, credit cards, loans, sales tax payable, customer deposits
Equity	Credit	Decrease	Increase	Owner's capital, retained earnings
Revenue	Credit	Decrease	Increase	Service income, product sales, interest income
Contra accounts	Opposite of parent	Varies	Varies	Accumulated depreciation and allowance for doubtful accounts (credit), sales returns (debit)

The DEALER memory aid

If tables are not your thing, remember the word DEALER:

• Draws or dividends, Expenses, Assets: increase with debits.
• Liabilities, Equity, Revenue: increase with credits.

Your chart of accounts groups accounts in exactly these categories, usually numbered so assets come first and expenses last, which makes the normal balance of each account easy to spot.

The bank statement trap

The single biggest source of confusion is your bank statement. When you deposit money, the bank says it has "credited" your account. When you pay a card bill, it "debits" your account. That seems to contradict the cheat sheet.

It does not. The bank writes the statement from its own books. Your deposit is money the bank owes you, which is a liability for the bank, and liabilities increase with credits. In your books, the same deposit is cash, an asset, and it increases with a debit. Same event, two ledgers, opposite labels. Once you see that, the rest of the system is consistent.

How to record a transaction with debits and credits

Use the same five steps for any transaction, whether you are posting a manual entry or checking what your software did:

1. Identify the accounts affected. Every transaction touches at least two. A customer payment touches cash and accounts receivable.
2. Classify each account. Is it an asset, liability, equity, revenue, expense or draw account?
3. Decide the direction. Is each account going up or down?
4. Apply the rule. Use the cheat sheet: an increase in an asset is a debit, an increase in revenue is a credit, and so on.
5. Check that debits equal credits. If they do not, one of the steps above is wrong.

Our step-by-step guide to journal entries covers more transaction types, including deposits, refunds and accruals.

A quick example of the five steps: you pay a $90 software subscription from the business account. The accounts are software expense and cash (step 1). Software is an expense and cash is an asset (step 2). The expense goes up and cash goes down (step 3). An expense increases with a debit and an asset decreases with a credit (step 4). Debit software expense $90, credit cash $90, and both sides equal $90 (step 5). With practice, this takes a few seconds in your head.

Debits and credits in a T-account

Bookkeepers often sketch accounts as a letter T: the account name across the top, debits on the left of the vertical line and credits on the right. It is the quickest way to see how a balance is built. Here is the cash account for the example that follows, starting from zero:

Cash: debits (left)	Cash: credits (right)
Client payment received: $5,240	Sales tax remitted: $400
	Owner's draw: $1,000
Total debits: $5,240	Total credits: $1,400
Balance: $3,840 debit

Because cash is an asset, its normal balance is a debit, and $5,240 minus $1,400 leaves a $3,840 debit balance. If the credits ever exceeded the debits, the account would show a credit balance, which for a bank account means it is overdrawn. A credit balance in an asset account, or a debit balance in a liability account, is always worth investigating: it is either an unusual situation or a posting error.

The same reading works for every account. A revenue T-account fills up on the right as you invoice, and only shows entries on the left when you issue a credit note or close the year. An expense account fills up on the left. Once you can picture the T, the cheat sheet stops being something to memorize and becomes something you can reason out.

Worked example: an invoice from issue to payment

Here is a sequence of real-world entries for a small marketing consultancy using accrual accounting. Each entry balances on its own, and the trial balance at the end balances too.

Entry 1: issue an invoice with sales tax

The consultancy invoices a client $5,000 for a campaign plus 8% sales tax of $400, a total of $5,400. You can check tax splits with the sales tax calculator.

Account	Debit	Credit
Accounts receivable	$5,400
Service revenue		$5,000
Sales tax payable		$400
Total	$5,400	$5,400

Entry 2: client pays by card, with a processing fee

The client pays the full $5,400 by card. The processor deposits $5,240 after keeping a $160 fee.

Account	Debit	Credit
Cash	$5,240
Merchant fees expense	$160
Accounts receivable		$5,400
Total	$5,400	$5,400

Note that the full invoice is cleared from receivables. Recording only $5,240 against the receivable would leave a phantom $160 balance on the customer's account.

Entry 3: buy supplies on credit

The consultancy receives a $300 bill for printed materials, payable in 30 days: debit supplies expense $300, credit accounts payable $300.

Entry 4: remit the sales tax

At the end of the filing period, the business pays the $400 of tax it collected: debit sales tax payable $400, credit cash $400. The liability goes to zero.

Entry 5: owner's draw

The owner transfers $1,000 to a personal account: debit owner's draws $1,000, credit cash $1,000. This is not an expense and does not reduce profit.

Trial balance after the five entries

Account	Debit	Credit
Cash (5,240 minus 400 minus 1,000)	$3,840
Accounts receivable (5,400 minus 5,400)	$0
Accounts payable		$300
Sales tax payable (400 minus 400)		$0
Owner's draws	$1,000
Service revenue		$5,000
Merchant fees expense	$160
Supplies expense	$300
Total	$5,300	$5,300

Debits of $3,840 + $1,000 + $160 + $300 = $5,300 equal credits of $300 + $5,000 = $5,300. For more on preparing and troubleshooting this report, see our trial balance guide.

Common debit and credit entries for small businesses

Transaction	Debit	Credit
Invoice a client (accrual)	Accounts receivable	Revenue (and sales tax payable)
Receive payment on an invoice	Cash	Accounts receivable
Cash sale (no invoice outstanding)	Cash	Revenue
Customer deposit before work	Cash	Unearned revenue (liability)
Issue a credit note	Sales returns and allowances	Accounts receivable
Receive a supplier bill	Expense or asset	Accounts payable
Pay a supplier bill	Accounts payable	Cash
Buy equipment with cash	Equipment	Cash
Record monthly depreciation	Depreciation expense	Accumulated depreciation
Loan payment	Loan payable (principal) and interest expense	Cash
Owner puts money in	Cash	Owner's capital
Write off a bad debt (allowance method)	Allowance for doubtful accounts	Accounts receivable

Month-end adjusting entries

Adjusting entries make sure revenue and expenses land in the right month under accrual accounting. They follow the same debit and credit rules:

• Accrued expense: you used $250 of contractor time in March but the bill arrives in April. Debit contractor expense $250, credit accrued liabilities $250. See our guide to accrued expenses.
• Prepaid expense used up: you paid $1,200 for a year of insurance in January. Each month, debit insurance expense $100 and credit prepaid insurance $100. Our guide to prepaid expenses shows the full schedule.
• Unearned revenue earned: a client paid a $3,000 retainer covering three months. Each month, debit unearned revenue $1,000 and credit service revenue $1,000.

In each case, one side of the entry hits the income statement and the other hits the balance sheet, and the debit always equals the credit.

For the last row, our sibling guide to the allowance for doubtful accounts shows the full set of entries. The depreciation row is covered in amortization vs depreciation.

Mistakes to avoid

• Reading debits as "bad". A debit to cash is good news. The word only means left side.
• Copying your bank's labels. Your deposit is a credit on the bank statement but a debit to cash in your books.
• Posting the whole loan payment to expense. Only the interest is an expense; the principal reduces the liability.
• Netting fees against revenue. Record the full invoice as revenue and the processor fee as an expense, so your sales figures match your invoices.
• Using a suspense account and forgetting it. Clear temporary balances every month so your general ledger stays accurate.

Create invoices that are easy to post

Every invoice you send becomes a debit to receivables and a credit to revenue, so a clean invoice makes for a clean entry. Show the pre-tax amount, the tax and the total on separate lines, and give each invoice a unique number from the invoice number generator. Build yours in minutes with the invoice generator, or pick a layout from our invoice templates, then post it using the cheat sheet above. When your invoice looks right, download it as a PDF and send it straight to your client.