Debits and Credits
Debits and Credits Definition
Debits and credits are the two entries that record every transaction in double-entry bookkeeping. A debit is recorded on the left side of an account and a credit on the right, and every journal entry must have total debits equal to total credits so the books stay in balance. The words do not mean "increase" or "decrease" on their own — their effect depends on the type of account.
Debits increase asset and expense accounts and decrease liability, equity, and revenue accounts. Credits do the opposite: they increase liability, equity, and revenue accounts and decrease asset and expense accounts. This discipline keeps the accounting equation — assets = liabilities + equity — in balance after every transaction, and it is the mechanism behind every revenue-recognition entry, from booking a customer prepayment as deferred revenue to recognizing it as revenue when the service is delivered.
Also referred to as: debit and credit, debits vs credits, double-entry bookkeeping, journal entry.
How debits and credits work
Double-entry bookkeeping records every transaction in at least two accounts: one or more debits and one or more credits that always sum to the same amount. This is what keeps the books balanced — if a journal entry's debits and credits are not equal, the entry is wrong. The convention is purely positional: debit means the left side of an account, credit means the right side, with no inherent "good" or "bad" meaning.
Because each entry hits two sides, double-entry bookkeeping builds in its own error check and produces a complete audit trail. The accounting equation — assets equal liabilities plus equity — holds after every transaction precisely because debits and credits offset each other.
Which accounts debits and credits increase
The effect of a debit or credit flips depending on the account type. Debits increase assets (cash, accounts receivable) and expenses, and decrease liabilities, equity, and revenue. Credits increase liabilities (including deferred revenue), equity, and revenue, and decrease assets and expenses.
A common mnemonic is DEALER: Dividends, Expenses, and Assets are increased by Debits; Liabilities, Equity, and Revenue are increased by Credits. So receiving cash is a debit to cash (an asset), while earning revenue is a credit to revenue.
Debits and credits in revenue recognition
Revenue recognition is where these rules show up daily for finance teams. When a customer prepays — for example, buying usage credits — you debit cash (an asset increases) and credit deferred revenue, also called a contract liability, because you have not yet earned the revenue.
As the customer consumes the service, you debit deferred revenue (the liability decreases) and credit revenue (revenue increases). The same debit-and-credit mechanics drive deferred-revenue waterfalls and the journal entries a revenue subledger posts to the general ledger under ASC 606 and IFRS 15.
When you'd use this
- Learning or explaining the basics of double-entry bookkeeping.
- Writing or reviewing journal entries for revenue, deferred revenue, or cash.
- Understanding how a revenue-recognition schedule posts to the general ledger.
- Reconciling why an entry does not balance.
Debits and Credits FAQ
What are debits and credits?
Debits and credits are the two sides of every journal entry in double-entry bookkeeping. A debit is the left side of an account and a credit is the right side, and every entry must have total debits equal to total credits so the books stay in balance.
Does a debit mean an increase or a decrease?
It depends on the account. A debit increases assets and expenses but decreases liabilities, equity, and revenue. A credit does the opposite — it increases liabilities, equity, and revenue and decreases assets and expenses.
Why do debits have to equal credits?
Because double-entry bookkeeping records every transaction in two or more accounts that offset each other. Keeping total debits equal to total credits is what keeps the accounting equation — assets = liabilities + equity — in balance and provides a built-in check that the entry is correct.
How are debits and credits used in revenue recognition?
When a customer prepays, you debit cash and credit deferred revenue (a contract liability), since the revenue is not yet earned. As the service is delivered or consumed, you debit deferred revenue and credit revenue. These entries are how a revenue subledger recognizes revenue under ASC 606 and posts it to the general ledger.