Jim Merritt - June 10, 2026

If you're new to accounting, you've probably heard the terms debits and credits and wondered why something that sounds so simple can be so confusing.

You're certainly not alone. Many small business owners, bookkeepers, and even accounting students struggle with these concepts when they're first starting out.

Here's the good news: Once you understand how debits and credits work, accounting starts making a lot more sense.

Whether you're managing your own books, learning accounting fundamentals, or using QuickBooks® software, understanding debits and credits will help you recognize mistakes, make better financial decisions, and feel more confident about your business finances.

Let's break it down into plain English.

Why Do Debits and Credits Matter?

Accounting uses a system called double-entry bookkeeping.

This means every financial transaction affects at least two accounts, and the total dollar amount of debits must always equal the total dollar amount of credits.

For example, when your business pays an electric bill, two things happen:

• Your utility expense increases.

• Your business checking account decreases.

Both sides of the transaction must be recorded properly.

Think of it like a seesaw. Both sides must stay balanced.

This system helps maintain accurate accounting records and is the foundation behind financial statements such as your Balance Sheet and Profit & Loss report.

However, remember that balanced debits and credits don't automatically mean everything was recorded correctly. You can still use the wrong account and have a transaction that balances perfectly.

That's one reason understanding the fundamentals is so important.

The Accounting Equation: Where Everything Begins

Everything in accounting revolves around one basic equation:

Assets = Liabilities + Equity

Let's define those three terms:

• Assets: Things your business owns or controls, such as cash, equipment, inventory, and accounts receivable.

• Liabilities: Amounts your business owes, such as loans, credit cards, and accounts payable.

• Equity: The owner's financial interest in the business after liabilities are subtracted from assets.

Here's a simple example.

Your business has $50,000 in assets and owes $20,000 in liabilities.

Your equity would be $30,000.

$50,000 Assets = $20,000 Liabilities + $30,000 Equity

Debits and credits help maintain this balance as transactions occur throughout the year.

Understanding Debits

A debit (DR) is simply an entry recorded on the left side of an accounting account.

A debit does not automatically mean money is coming into your business, and it certainly doesn't mean something good or bad happened.

It depends entirely on the type of account involved.

Debits increase:

• Assets

• Expenses

• Owner draws or dividends

Debits decrease:

• Liabilities

• Equity

• Revenue

Example: Purchasing Business Equipment

Let's say your business purchases a new laptop for $2,500 and pays for it using your business checking account.

Assuming the laptop is recorded as a fixed asset, the accounting entry would be:

Why?

• Computer Equipment is an asset, and the value of that asset increased. Therefore, we debit the equipment account.

• Business Checking is also an asset, but the cash balance decreased. Therefore, we credit the checking account.

Notice something important: Both accounts are assets, yet one receives a debit and the other receives a credit.

That's perfectly normal.

Note: Whether a laptop should be capitalized or expensed depends on the business's accounting policies and applicable tax rules.

Understanding Credits

A credit (CR) is an entry recorded on the right side of an accounting account.

Just like debits, credits can increase or decrease an account depending on the account type.

Credits increase:

• Liabilities

• Equity

• Revenue

Credits decrease:

• Assets

• Expenses

• Owner draws or dividends

Example: Receiving Payment for Services

Let's assume your business performs $2,000 worth of services and the customer pays immediately.

The accounting entry would be:

Why?

• Cash increased, and cash is an asset. Therefore, we debit Business Checking.

• Service Revenue increased, and revenue accounts increase with credits.

Again, both sides balance.

Important QuickBooks® Tip: If you previously created an invoice for the customer, the accounting treatment is different. Receiving payment against that invoice generally increases cash (or Undeposited Funds) and decreases Accounts Receivable. It does not record the revenue a second time.

This is one of those details that can create problems when transactions aren't recorded correctly.

Debits and Credits: A Quick Reference Chart

Here's a chart you can refer to whenever you're unsure whether to debit or credit an account.

Remember: A debit or credit does not necessarily mean an increase or decrease in money. It describes how an individual accounting account is affected.

An Easy Way to Remember: DEALER

One popular memory aid for learning debits and credits is the acronym DEALER.

DEAL — Accounts That Increase With Debits

• D — Dividends (or Owner Draws)

• E — Expenses

• A — Assets

LER — Accounts That Increase With Credits

• L — Liabilities

• E — Equity

• R — Revenue

If you can remember DEALER, you've already learned one of the most important rules in accounting.

Real-World Example: Paying Your Electric Bill

Let's say your business pays its monthly electric bill of $200 directly from its checking account.

The accounting entry would look like this:

Here's what's happening:

1. Your Utilities Expense increased by $200, so we debit the expense account.

2. Your Business Checking balance decreased by $200, so we credit the checking account.

Both sides balance, and the transaction is properly recorded.

Pretty straightforward once you understand the rules!

How Do Debits and Credits Work in QuickBooks® Software?

Here's something I always like to explain to clients.

When you're using QuickBooks® Online or QuickBooks® Desktop, you don't necessarily need to enter debits and credits manually.

The software handles the underlying accounting entries for many everyday transactions.

For example:

• Creating an invoice typically increases Accounts Receivable and records revenue.

• Receiving a payment against an invoice increases cash or Undeposited Funds and decreases Accounts Receivable.

• Paying a current utility expense from your checking account increases Utilities Expense and decreases cash.

• Entering a vendor bill increases an expense or asset account and increases Accounts Payable.

• Paying that vendor bill decreases Accounts Payable and decreases cash.

QuickBooks® software handles the double-entry bookkeeping behind these activities.

However, there's something important to understand.

Just because QuickBooks® software creates the accounting entries doesn't mean the entries are necessarily correct.

The software records transactions based on the information you enter and the accounts you select.

Choose the wrong account, and your financial reports can become inaccurate even though the debits and credits balance.

If you're uncertain how your transactions should be entered, QuickTrainer offers One-on-One Training for QuickBooks Users designed to explain both the software and the accounting principles behind it.

Common Debit and Credit Mistakes Beginners Make

Over the years, I've worked with many business owners who understand how to enter transactions in QuickBooks® software but aren't always sure what's happening behind the scenes.

Here are a few common mistakes worth watching for.

1. Assuming Debits Are Good and Credits Are Bad

Debits and credits aren't positive or negative labels.

They simply describe which side of an account receives the entry.

2. Confusing Banking Terminology With Accounting Terminology

Your bank may describe a deposit as a credit to your account.

From your business's accounting perspective, that same deposit generally represents a debit to your cash account.

Why the difference?

Because the bank and your business are looking at the transaction from different accounting perspectives.

3. Recording Loan Payments Entirely as Expenses

This is a common accounting mistake.

When you make a loan payment, part of that payment may reduce the outstanding loan balance, while another portion represents interest expense.

Recording the entire payment as an expense can distort both your Profit & Loss and Balance Sheet.

4. Categorizing Transactions Without Understanding the Account Type

Just because you can select an account in QuickBooks® doesn't mean it's the correct account.

Understanding whether you're dealing with an asset, liability, equity, income, or expense account helps prevent classification mistakes.

5. Assuming Balanced Books Mean Accurate Books

A journal entry can have equal debits and credits and still be completely wrong.

For example, recording the purchase of equipment as office supplies may balance perfectly, but it could misstate your financial reports.

If your Balance Sheet or Profit & Loss doesn't look right, QuickTrainer's Data Review Services for QuickBooks® Users can help identify unusual balances, misclassified transactions, and other accounting inconsistencies.

When more extensive corrections are needed, our Cleanup Services for QuickBooks® Users can help get your records back on track.

Practice Makes Perfect

The best way to become comfortable with debits and credits is to practice with transactions you encounter every day.

Start with simple questions:

What account is being affected?

Is that account an asset, liability, equity, revenue, or expense account?

Is the account increasing or decreasing?

Once you answer those three questions, deciding whether to debit or credit the account becomes much easier.

Over time, you'll begin recognizing patterns.

And here's something else worth remembering: You don't need to become an accountant to benefit from understanding accounting.

As a business owner, knowing the basics can help you make better decisions, ask better questions, and recognize when something doesn't look right.

Final Thoughts: Understanding the Numbers Behind Your Business

Debits and credits are the foundation of double-entry bookkeeping.

They may seem confusing at first, but once you understand how different account types increase and decrease, the process becomes far more logical.

If you're using QuickBooks® software, learning these fundamentals can also help you understand why transactions appear on your financial reports the way they do.

At QuickTrainer, we believe small business owners should understand their numbers—not simply enter transactions and hope everything works out.

The better you understand your accounting, the better equipped you are to manage your business.

Need Help Understanding Debits, Credits, or QuickBooks® Software?

That's where QuickTrainer can help.

Since 2006, QuickTrainer, Inc. has helped small and mid-size businesses gain greater confidence in their accounting records and get more from QuickBooks® software.

Our services include:

• One-on-One Training for QuickBooks Users — Personalized, hands-on instruction tailored to your experience level and business needs.

• Data Review Services for QuickBooks® Users — Identify questionable balances, account classification issues, and other potential problems.

• Cleanup Services for QuickBooks® Users — Correct accounting errors and help restore confidence in your financial records.

We also provide setup assistance, bookkeeping, and ongoing guidance for businesses using QuickBooks® Online and QuickBooks® Desktop.

QuickTrainer is located in Wilmington, NC and works remotely with businesses throughout the United States.

Whether you're just getting started or have been using QuickBooks® software for years, we're here to help you understand not just what to do, but why you're doing it.

📞 Call QuickTrainer at 910-338-0488

📧 Email: [email protected]

🌐 Website: www.qti-wilmington.com

Let QuickTrainer give you back your time.

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