Debits and Credits Explained, with a Balanced Example

A debit is not automatically bad, and a credit is not automatically good. In double-entry bookkeeping, they identify the two sides of an entry. Their effect depends on the type of account. Once you separate those ideas, the rules become much easier to use.

This guide uses an imaginary service business and amounts in Canadian dollars. To focus on double entry, it leaves out sales tax, income tax, opening balances and depreciation (spreading an asset’s cost over time). Use it to learn, not as a complete set of recording rules or a reason to experiment in a client’s live books.

1. Think left and right before increase and decrease

In a traditional account layout, debit is the left side and credit is the right. Every transaction has equal total debits and credits, although it may involve more than two accounts. The entry must also reflect the transaction’s real substance; a balanced but invented entry is still wrong.

The accounting equation is assets = liabilities + equity. Assets are resources the business controls. Liabilities are what it owes. Equity is what remains after subtracting those debts. In this simple model, revenue increases profit and equity; expenses reduce them. These links explain the usual account balances. Do not assume every payment received must be a “credit.”

Bank-statement language causes confusion because the bank is recording its relationship with you, not preparing your business ledger. Start from the business’s accounts and the supporting documents rather than copying the statement’s debit/credit labels blindly.

2. Use normal balances as a guide, not a diagnosis

Normal balances for common account categories

Account category	Increase	Decrease
Assets	Debit	Credit
Expenses	Debit	Credit
Liabilities	Credit	Debit
Owner’s capital / equity	Credit	Debit
Revenue	Credit	Debit

Some accounts work differently. A contra-account offsets another account. For example, accumulated depreciation tracks the asset cost already spread over past periods. It normally moves in the opposite direction from the related asset account. Money the owner withdraws is not automatically a business expense. Check an unusual balance, but do not assume it proves an error in the account or software.

3. Follow six connected journal entries

The imaginary owner starts with no opening balances. Each row is a transaction with equal debits and credits. We assume the service revenue can be recorded when invoiced. Accounts receivable means money customers owe; accounts payable means money owed to suppliers.

Original learning example — amounts in CAD

Transaction	Debit	Credit
Owner contributes $2,000	Cash $2,000	Owner’s capital $2,000
Buy equipment on credit, $900	Equipment $900	Accounts payable $900
Pay monthly software cost, $80	Software expense $80	Cash $80
Invoice completed services, $600	Accounts receivable $600	Service revenue $600
Collect $250 against that invoice	Cash $250	Accounts receivable $250
Pay equipment supplier $300	Accounts payable $300	Cash $300

The receipt against the customer invoice reduces the receivable; it does not create another sale. The supplier payment reduces the payable; it does not purchase the same equipment again. Matching a payment to an existing transaction is a major practical use of this logic.

4. Prove the example with a trial balance

After those entries, cash is $1,870, receivables are $350, equipment is $900 and payables are $600. Revenue is $600 and the software expense is $80. Before closing the revenue and expense accounts, the trial balance is:

Unclosed trial balance — amounts in CAD

Account	Debit balance	Credit balance
Cash	$1,870	—
Accounts receivable	$350	—
Equipment	$900	—
Software expense	$80	—
Accounts payable	—	$600
Owner’s capital	—	$2,000
Service revenue	—	$600
Total	$3,200	$3,200

Assets total $3,120. Liabilities of $600 plus equity of $2,520 also total $3,120. Equity includes the $2,000 contribution and $520 profit. These checks connect the journal, the trial balance and the accounting equation rather than treating them as unrelated exercises.

5. Know what equal totals cannot prove

A trial balance can balance even when a transaction is missing, duplicated, posted to the wrong accounts or recorded in the wrong period. Both sides of an entry can also contain the same incorrect amount. Equal totals are a control, not a complete quality review.

Before fixing a possible error, find the receipt, invoice or other supporting document. Check what was originally entered. Follow your accounting software’s correction process and keep its audit trail, the history of changes. Do not add an unexplained entry or delete history just to make a report look right.

Real Canadian transactions may include goods and services tax (GST), harmonized sales tax (HST) and other taxes. How you record them depends on the transaction and the business. Do not copy these teaching entries into real books without adjusting for the taxes and other rules that apply.

6. Practise by explaining the transaction aloud

For your next training entry, answer four questions: What happened? Which accounts change? Which direction does each account move? What document supports that conclusion? Then check that the debit and credit totals agree.

Ask a reviewer to challenge the classification, not just the arithmetic. For example, is the purchase a current-period service, prepaid service or equipment? The correct answer can change the accounts even when the cash payment is identical.

Record the actual entries in an accounting system. If a team uses Bookwits, its tasks can assign the unresolved question and its documents can organize supporting files. That coordination does not turn Bookwits into the ledger or validate the accounting treatment.