Debit and Credit Explained: The Simple Guide That Finally Makes Accounting Make Sense (Part 2)
Parts 2–6: A practical beginner-friendly guide to Assets, Liabilities, Equity, Revenue, Expenses, real-world examples, common mistakes, memory shortcuts, and practice exercises.
Part 2: Assets, Liabilities, and Equity
In Part 1, we learned the foundation:
Debit means left. Credit means right.
Now we need to learn something more powerful:
Whether debit increases or decreases an account depends on the type of account.
This is where accounting begins to make sense.
The Accounting Equation Again
Assets = Liabilities + Equity
This equation has two sides:
| Left Side | Right Side |
|---|---|
| Assets | Liabilities + Equity |
Now connect this to debit and credit:
- Assets live naturally on the debit side.
- Liabilities and Equity live naturally on the credit side.
This is why assets increase with debits, while liabilities and equity increase with credits.
1. Assets: Things the Business Owns
An asset is something the business owns or controls that has value.
Examples include:
- Cash
- Bank balance
- Inventory
- Equipment
- Furniture
- Vehicles
- Buildings
- Amounts customers owe the business
Assets increase with debits and decrease with credits.
| Asset Account | Increase | Decrease |
|---|---|---|
| Cash | Debit | Credit |
| Inventory | Debit | Credit |
| Equipment | Debit | Credit |
Example: The Business Receives Cash
You put $10,000 into your business.
Cash is an asset. Cash increased. Assets increase with debits.
| Debit | Credit |
|---|---|
| Cash $10,000 | Owner Capital $10,000 |
Cash increased, so Cash is debited.
2. Liabilities: Things the Business Owes
A liability is an obligation. It is something the business must pay, settle, or deliver in the future.
Examples include:
- Bank loans
- Amounts owed to suppliers
- Credit card balances
- Taxes payable
- Wages payable
- Rent payable
Liabilities increase with credits and decrease with debits.
Example: The Business Borrows Money
Your business borrows $20,000 from a bank.
Two things happen:
- Cash increases.
- Loan payable increases.
| Debit | Credit |
|---|---|
| Cash $20,000 | Bank Loan Payable $20,000 |
Cash is an asset, and it increased, so Cash is debited.
Loan Payable is a liability, and it increased, so Loan Payable is credited.
3. Equity: The Owner’s Share of the Business
Equity represents the owner’s claim on the business after liabilities are deducted from assets.
In simple language:
Equity is what belongs to the owner after debts are paid.
Examples include:
- Owner capital
- Share capital
- Retained earnings
- Accumulated profits
Equity increases with credits and decreases with debits.
Example: Owner Invests Cash
The owner contributes $5,000 into the business.
Two things happen:
- Cash increases.
- Owner Capital increases.
| Debit | Credit |
|---|---|
| Cash $5,000 | Owner Capital $5,000 |
The Big Part 2 Rule
| Account Type | Increase With | Decrease With |
|---|---|---|
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Equity | Credit | Debit |
Part 3: Revenue and Expenses
Now we add two account types that every beginner must understand:
- Revenue
- Expenses
Revenue and expenses are connected to Equity because they affect the owner’s wealth.
Revenue: Money Earned by the Business
Revenue is income earned from selling goods or providing services.
Examples include:
- Sales revenue
- Service income
- Consulting fees
- Rental income
- Interest income
Revenue increases profit. Profit increases equity. Since equity increases with credits, revenue also increases with credits.
Revenue increases with credits and decreases with debits.
Example: Cash Sale
Your business sells goods for $800 cash.
Two things happen:
- Cash increases.
- Revenue increases.
| Debit | Credit |
|---|---|
| Cash $800 | Sales Revenue $800 |
Cash is an asset and increased, so Cash is debited.
Revenue increased, so Revenue is credited.
Expenses: Costs Incurred to Run the Business
Expenses are costs the business incurs to earn revenue and operate.
Examples include:
- Rent expense
- Salary expense
- Electricity expense
- Internet expense
- Advertising expense
- Fuel expense
- Insurance expense
Expenses reduce profit. Lower profit reduces equity. Since equity decreases with debits, expenses increase with debits.
Expenses increase with debits and decrease with credits.
Example: Paying Rent
Your business pays $1,200 rent in cash.
Two things happen:
- Rent Expense increases.
- Cash decreases.
| Debit | Credit |
|---|---|
| Rent Expense $1,200 | Cash $1,200 |
The Five Account Types
| Account Type | Normal Increase Side |
|---|---|
| Assets | Debit |
| Expenses | Debit |
| Liabilities | Credit |
| Equity | Credit |
| Revenue | Credit |
Assets and Expenses increase with debits. Liabilities, Equity, and Revenue increase with credits.
Part 4: 30+ Real-World Debit and Credit Examples
The best way to understand debit and credit is to see many ordinary transactions. Each example follows the same method:
- Identify the accounts affected.
- Identify whether each account increases or decreases.
- Apply the debit and credit rule.
| No. | Transaction | Debit | Credit |
|---|---|---|---|
| 1 | Owner invests $10,000 cash | Cash $10,000 | Owner Capital $10,000 |
| 2 | Business borrows $25,000 from bank | Cash $25,000 | Bank Loan Payable $25,000 |
| 3 | Buy equipment for $3,000 cash | Equipment $3,000 | Cash $3,000 |
| 4 | Buy inventory for $2,000 cash | Inventory $2,000 | Cash $2,000 |
| 5 | Buy inventory on credit for $4,000 | Inventory $4,000 | Accounts Payable $4,000 |
| 6 | Pay supplier $1,500 | Accounts Payable $1,500 | Cash $1,500 |
| 7 | Cash sale of $900 | Cash $900 | Sales Revenue $900 |
| 8 | Credit sale of $1,200 | Accounts Receivable $1,200 | Sales Revenue $1,200 |
| 9 | Customer pays $1,200 owed | Cash $1,200 | Accounts Receivable $1,200 |
| 10 | Pay rent $1,000 | Rent Expense $1,000 | Cash $1,000 |
| 11 | Pay salaries $2,500 | Salary Expense $2,500 | Cash $2,500 |
| 12 | Pay electricity bill $300 | Utilities Expense $300 | Cash $300 |
| 13 | Receive service income $700 cash | Cash $700 | Service Revenue $700 |
| 14 | Pay advertising $450 | Advertising Expense $450 | Cash $450 |
| 15 | Buy vehicle for $15,000 cash | Vehicle $15,000 | Cash $15,000 |
| 16 | Buy vehicle using loan $15,000 | Vehicle $15,000 | Vehicle Loan Payable $15,000 |
| 17 | Pay loan principal $2,000 | Loan Payable $2,000 | Cash $2,000 |
| 18 | Pay interest $200 | Interest Expense $200 | Cash $200 |
| 19 | Owner withdraws $1,000 | Owner Drawings $1,000 | Cash $1,000 |
| 20 | Receive interest income $100 | Cash $100 | Interest Income $100 |
| 21 | Pay insurance $600 | Insurance Expense $600 | Cash $600 |
| 22 | Pay internet bill $120 | Internet Expense $120 | Cash $120 |
| 23 | Buy office supplies $250 | Office Supplies $250 | Cash $250 |
| 24 | Use supplies worth $80 | Supplies Expense $80 | Office Supplies $80 |
| 25 | Receive deposit from customer $500 | Cash $500 | Unearned Revenue $500 |
| 26 | Earn the customer deposit | Unearned Revenue $500 | Service Revenue $500 |
| 27 | Receive bill for repairs $350, unpaid | Repair Expense $350 | Accounts Payable $350 |
| 28 | Pay repair bill later | Accounts Payable $350 | Cash $350 |
| 29 | Owner adds equipment worth $2,000 | Equipment $2,000 | Owner Capital $2,000 |
| 30 | Bank charges monthly fee $25 | Bank Charges Expense $25 | Cash $25 |
| 31 | Sell old equipment for $1,000 cash | Cash $1,000 | Equipment $1,000 |
| 32 | Pay tax bill $700 | Tax Payable $700 | Cash $700 |
Part 5: Common Mistakes and Memory Shortcuts
Mistake 1: Thinking Debit Always Means Increase
This is the most common beginner mistake. Debit increases assets and expenses, but debit decreases liabilities, equity, and revenue.
Mistake 2: Thinking Credit Always Means Decrease
Credit decreases assets and expenses, but credit increases liabilities, equity, and revenue.
Mistake 3: Learning From Bank Statements First
Bank statements are confusing because they show the bank’s perspective, not your business’s perspective.
Mistake 4: Forgetting That Every Transaction Has Two Sides
If you only record what increased, your accounting will not balance. Always ask what else changed.
Mistake 5: Confusing Assets and Expenses
Buying a computer is usually an asset. Paying electricity is usually an expense. An asset gives future benefit. An expense is consumed to operate the business.
The Memory Shortcut: DEALER
DEALER
| Debit Side | Credit Side |
|---|---|
| Dividends or Drawings | Liabilities |
| Expenses | Equity |
| Assets | Revenue |
The left side of DEALER helps you remember what normally increases with debits: Drawings, Expenses, Assets.
The right side helps you remember what normally increases with credits: Liabilities, Equity, Revenue.
The Three-Question Method
- What accounts changed?
- Did each account increase or decrease?
- What type of account is each one?
This method works for almost every beginner-level transaction.
Part 6: Exercises and Mastery
Now test your understanding. Try answering each exercise before looking at the answer.
Exercise Set A: Identify the Debit and Credit
| No. | Transaction | Answer |
|---|---|---|
| 1 | Owner invests $8,000 cash | Debit Cash, Credit Owner Capital |
| 2 | Pay office rent $900 | Debit Rent Expense, Credit Cash |
| 3 | Sell services for $1,400 cash | Debit Cash, Credit Service Revenue |
| 4 | Buy supplies on credit $300 | Debit Supplies, Credit Accounts Payable |
| 5 | Pay supplier $300 | Debit Accounts Payable, Credit Cash |
| 6 | Borrow $12,000 from bank | Debit Cash, Credit Loan Payable |
| 7 | Pay salary $2,000 | Debit Salary Expense, Credit Cash |
| 8 | Customer pays amount owed $600 | Debit Cash, Credit Accounts Receivable |
Exercise Set B: Explain Why
Question: A business pays $500 for advertising. Why is Advertising Expense debited?
Answer: Advertising Expense is an expense account. Expenses increase with debits. Cash decreases, so Cash is credited.
Question: A business receives $1,000 cash from a customer for services. Why is Service Revenue credited?
Answer: Service Revenue is a revenue account. Revenue increases with credits. Cash is an asset and increased, so Cash is debited.
Question: A business buys inventory on credit. Why is Accounts Payable credited?
Answer: Accounts Payable is a liability. The business now owes more to a supplier. Liabilities increase with credits.
The Final Mastery Checklist
- You know debit means left.
- You know credit means right.
- You know assets increase with debits.
- You know expenses increase with debits.
- You know liabilities increase with credits.
- You know equity increases with credits.
- You know revenue increases with credits.
- You know every transaction affects at least two accounts.
- You know debits must equal credits.
The One-Sentence Summary
Debit and credit are the left and right sides of accounting used to record both effects of every business transaction so the accounting equation stays balanced.
Once you understand that, accounting becomes far less frightening.
You no longer need to guess whether something is a debit or a credit.
You simply ask:
- What changed?
- Did it increase or decrease?
- What type of account is it?
That is how beginners become confident. That is how professionals think. And that is how debit and credit finally begin to make sense.
In Part 3., we will focus on how revenue and expenses work in debit and credit accounting.