Debits and Credits Explained: A Beginner’s Guide for New Business Owners
If you’re just starting your business or stepping into bookkeeping for the first time, the terms debit and credit might feel like an entirely different language. Don’t worry—these are not mysterious financial spells. Understanding them is crucial to keeping your books accurate, avoiding costly mistakes, and making informed business decisions.
Let’s break it down in simple, practical terms.
What Are Debits and Credits?
At its core, bookkeeping is about tracking where your money comes from and where it goes. Every transaction affects at least two accounts, which is the foundation of double-entry bookkeeping.
Debit (Dr) – Usually represents money coming into an account.
Credit (Cr) – Usually represents money leaving an account.
Think of it like a seesaw: for every debit, there’s an equal and opposite credit. This balance keeps your books accurate.
How Debits and Credits Work by Account Type
Here’s the easiest way to remember how debits and credits affect your accounts:
Account Type Debit (Dr) Credit (Cr)
__________________________________________________________________________________________________
Assets (cash, inventory, equipment) Increase Decrease
Liabilities (loans, bills payable) Decrease Increase
Equity (owner’s capital, retained earnings) Decrease Increase
Revenue / Income Decrease Increase
Expenses Increase Decrease
Example 1: Buying Office Supplies for Cash
You spend $200 in cash for office supplies.
Debit: Office Supplies (asset) +$200
Credit: Cash (asset) −$200
Example 2: Receiving Payment from a Customer
A client pays $500 for a service.
Debit: Cash (asset) +$500
Credit: Revenue (income) +$500
See the pattern? Debits and credits always balance, and the type of account determines whether you increase or decrease it.
Why This Matters for New Business Owners
Accuracy: Knowing the difference prevents errors that could lead to misstated financials or tax issues.
Better Decision-Making: Accurate records mean you know exactly how much cash you have, what you owe, and your profit margins.
Simpler Tax Filing: Proper bookkeeping makes it easier to file taxes or work with an accountant.
Quick Tips to Remember
“Debit left, credit right” – Debits are always on the left side of an account, credits on the right.
Think in terms of increase/decrease for each account type – Assets and expenses increase with debits; liabilities, equity, and revenue increase with credits.
Every transaction has two sides – Always check that your debits equal your credits.
Final Thought
Debits and credits are the backbone of bookkeeping, but they’re far from intimidating once you understand the rules. As a new business owner, learning this early saves headaches later. And if it ever feels confusing, remember: every transaction is just a swap—money or value going somewhere and coming from somewhere else.
Master this, and you’ll have a solid foundation for managing your books, making smarter financial decisions, and growing your business with confidence.