What are debits and credits?
Forget everything "debit" and "credit" mean on your bank statement — in bookkeeping, they're just directional labels, and the confusion usually comes from assuming they mean "subtract" and "add." They don't.
The basic rule
Every transaction touches at least two accounts, and total debits always equal total credits — that's what "double-entry" bookkeeping means. Whether a debit or credit increases or decreases an account depends on what type of account it is.
What increases with a debit
- Assets (cash, equipment, accounts receivable)
- Expenses
What increases with a credit
- Liabilities (loans, accounts payable)
- Equity
- Revenue
A simple example
You buy $500 of supplies with cash. You'd debit Supplies Expense $500 (an expense account increasing) and credit Cash $500 (an asset account decreasing). Two entries, equal amounts, books stay balanced.
Why it's worth understanding, even if software does it for you
Accounting software applies these rules automatically, so most business owners never have to think about them — until something looks wrong on a report and they need to trace why. Understanding the basic logic makes it much easier to spot a miscategorized transaction, or to actually understand what your financial statements are telling you instead of just trusting the software blindly.