Debits and credits: the rules explained

Assets, expenses and drawings increase with a debit; liabilities, capital and income increase with a credit. The reason is the accounting equation: once income, expenses and drawings are written into it, everything on the left hand side is a debit and everything on the right hand side is a credit, so every transaction must add equal amounts to both sides. If you remember which side of the equation an account sits on, you never need to memorise the rule.

Where do the debit and credit rules come from?

Start with the balance sheet. ACCA’s study material puts the accounting equation as assets equal capital plus liabilities, and notes that this layout shows why total debits always equal total credits: assets are debits, capital and liabilities are credits. ACCA then expands the equation to bring in the profit and loss account:

Assets = Capital introduced + (Income less Expenses) less Drawings + Liabilities

Move the two negative items, expenses and drawings, across to the left so that nothing is subtracted:

Assets + Expenses + Drawings = Capital + Income + Liabilities

That rearranged equation is the whole rule. The left hand side is the debit side and the right hand side is the credit side. To increase anything on the left you debit it; to increase anything on the right you credit it. Decreases go the opposite way. Because every transaction must keep the equation in balance, every debit has an equal credit somewhere. The general mechanics are covered in our guide to double entry bookkeeping; this page concentrates on why each account behaves as it does.

Why are expenses debits if they reduce profit?

This is the point most people find counterintuitive. Profit belongs to the owners, so it increases capital, which is a credit. An expense reduces profit and therefore reduces capital. A reduction in a credit balance is a debit. Rather than debiting capital directly every time rent is paid, bookkeeping collects those reductions in separate expense accounts, which therefore carry debit balances. At the year end they are netted against income and the result moves into capital or retained earnings.

Income works the other way. A sale increases profit, which increases capital, so it is recorded as a credit in a sales account. Drawings by a sole trader, and dividends declared by a company, reduce what the owners have left in the business, so they are debits.

Why are assets debits and liabilities credits?

Think of it as where the money is and where it came from. Debits record what the business has or has spent: cash in the bank, equipment, stock, amounts customers owe, and costs incurred. Credits record where those resources came from: the owners, lenders, suppliers not yet paid, HMRC for tax not yet paid, and customers who have paid for sales. “Debit” and “credit” are simply the left and right columns of a ledger account; neither means good or bad.

What are the entries for everyday transactions?

Illustration only. These assume a VAT registered business and that VAT is recorded separately. ACCA’s examples of a credit sale and purchase use the same pattern: debit trade receivables and credit revenue when the invoice is raised, debit bank and credit trade receivables when it is paid, and the mirror entries for purchases and supplier payments.

Transaction	Debit	Credit
Owner puts money into the business	Bank	Capital (or share capital)
Cash sale banked	Bank (gross)	Sales (net) and VAT (the VAT)
Invoice a customer	Trade debtors (gross)	Sales (net) and VAT
Customer pays the invoice	Bank	Trade debtors
Issue a credit note to a customer	Sales (net) and VAT	Trade debtors (gross)
Supplier invoice for stock	Purchases (net) and VAT	Trade creditors (gross)
Pay the supplier	Trade creditors	Bank
Rent paid by direct debit	Rent	Bank
Bank charges taken	Bank charges	Bank
Van bought with a bank loan	Motor vehicles	Loan
Loan repayment including interest	Loan (capital part) and Interest (interest part)	Bank
Monthly payroll	Wages (gross) and Employer’s NIC	Net wages owed, and PAYE and NIC owed to HMRC
Pay HMRC the PAYE	PAYE and NIC owed	Bank
Pay the VAT return	VAT	Bank
Sole trader takes money out	Drawings	Bank
Year end depreciation	Depreciation expense	Accumulated depreciation

Notice the loan repayment. Only the interest is an expense; the capital part reduces a liability. Posting the whole payment to an expense code is one of the most common errors in small business books.

Why does the bank statement say credit when money comes in?

The bank statement is written from the bank’s point of view. Your deposit is money the bank owes you, which is a liability in its books, so it credits your account when you pay in. In your own books the same money is an asset and is a debit to the bank account. The two records are mirror images, which is why a bank reconciliation compares a debit balance in the cash book with a credit balance on the statement. An overdraft reverses this: in your books it is a credit balance, because you owe the bank.

A business credit card works the same way. Spending on the card increases a liability, so the card account is credited and the expense debited; paying the card off debits the card account and credits the bank.

What are contra accounts and why do they break the pattern?

A contra account sits within one category but carries the opposite balance, so it can reduce a figure without changing the original record. The two most common are:

• Accumulated depreciation. It belongs with fixed assets but carries a credit balance, so the cost of the asset stays visible while the net book value falls. Our guide to depreciation methods explains how the charge is calculated.
• Allowance for receivables. ACCA describes this as an allowance for irrecoverable debts held in a separate account. It carries a credit balance that is deducted from trade receivables in the balance sheet. An increase is debited to the irrecoverable debts expense and credited to the allowance; ACCA notes that a decrease reverses that entry. A debt that is definitely irrecoverable is instead written off by debiting irrecoverable debts and crediting trade receivables.

Sales returns and discounts allowed are also debit balances within income, and they work as reductions of sales.

How can you check you have picked the right side?

1. Find the bank side first. Money in is a debit to bank and money out is a credit. The other side of the entry then follows.
2. Ask which side of the equation the other account sits on. Asset, expense or drawings: debit to increase. Liability, capital or income: credit to increase.
3. Check the balance looks normal. An expense account with a credit balance, or a creditor account with a debit balance, usually means something has been posted the wrong way round or twice.
4. Look at the trial balance. It will balance even when an entry is reversed, so balanced totals do not prove the sides were right.

What mistakes come up most often?

• Reversing the bank entry because the bank statement says credit, which turns receipts into payments.
• Posting VAT inclusive amounts to sales or expenses, so the VAT account is wrong and income or costs are overstated.
• Treating a director’s withdrawals as wages when no payroll has been run; for a company these usually belong in the director’s loan account.
• Posting a refund from a supplier to sales rather than crediting the expense or the supplier account it relates to.
• Expensing capital purchases rather than debiting a fixed asset account.

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Related Accountapedia entries

• Capital and drawings accounts for sole traders
• Year end closing entries
• Single entry bookkeeping vs double entry
• The general ledger and subsidiary ledgers
• The cash book explained
• Cash flow forecasting

Sources

• ACCA: Accounting equation
• ACCA: Sales comp acc system
• ACCA: Trade receivables and revenue
• GOV.UK: Vat rates

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.