Debit and Credit Explained in Simple Words with Examples
Debit and credit are basic accounting terms, but they can be confusing when you first start reading business accounts.
If you have recently started a business and are beginning to work with invoices, ledgers and accounting reports, this guide is for you. It explains debit and credit using simple, everyday business examples instead of textbook definitions.
Quick summary
- Debit is the left side of an accounting entry, while credit is the right side.
- Assets and expenses normally increase with a debit. Liabilities, capital and income normally increase with a credit.
- Every double-entry transaction must have equal total debits and credits.
- Debit does not always mean money going out, and credit does not always mean money coming in.
- Your bank statement may use these terms differently because it shows transactions from the bank’s point of view.
What Do Debits and Credits Mean?
A debit is an entry on the left side of an account. A credit is an entry on the right side. Neither term automatically tells you whether money came in or went out. Its effect depends on the type of account involved.
For example, suppose a customer pays ₹20,000 into your business bank account. Your bank balance increases, so Bank is debited. If you later pay ₹5,000 of rent from that account, the bank balance falls, so Bank is credited.
Under double-entry accounting, every transaction affects at least two accounts and total debits must equal total credits.
Debit vs Credit: The Basic Rule
| Account Type | What It Represents | Increases With | Decreases With | Examples |
|---|---|---|---|---|
| Assets | What the business owns or is owed | Debit | Credit | Cash, bank, inventory, customer dues, machinery |
| Expenses | Costs of running the business | Debit | Credit | Rent, electricity, salaries, delivery charges |
| Liabilities | What the business owes | Credit | Debit | Supplier dues, loans, GST payable |
| Owner’s Capital | Owner’s stake in the business | Credit | Debit | Money introduced by the owner |
| Income | What the business earns | Credit | Debit | Sales, service income, commission |
| Owner’s Drawings | Money or assets taken for personal use | Debit | Credit | Personal withdrawals |
Account Type
What It Represents
Increases With
Decreases With
Examples
Account Type
What It Represents
Increases With
Decreases With
Examples
Account Type
What It Represents
Increases With
Decreases With
Examples
Account Type
What It Represents
Increases With
Decreases With
Examples
Account Type
What It Represents
Increases With
Decreases With
Examples
Account Type
What It Represents
Increases With
Decreases With
Examples
Instead of deciding an entry based on whether cash came in or went out, first identify the type of account and whether its balance increased or decreased.
Golden Rules or the Modern Method?
You may also come across the traditional golden rules of accounting:
- Debit the receiver, credit the giver.
- Debit what comes in, credit what goes out.
- Debit expenses and losses, credit incomes and gains.
These rules classify accounts as personal, real or nominal. The account-type method used above looks at assets, expenses, liabilities, capital and income instead. Both approaches are designed to arrive at the same entry.
If you are learning accounting for the first time, the account-type method can be easier because you only need to identify what changed and whether it increased or decreased.
Six Simple Accounting Entries for a New Business
Assume Priya has recently started a small trading business. These examples show how common transactions would appear as accounting entries in her books. In the entries below, ‘Dr.’ means debit and ‘A/c’ means account.
| Transaction | Accounting Entry | Why |
|---|---|---|
| Priya puts ₹2,00,000 into the business bank account | Bank A/c Dr. ₹2,00,000 To Capital A/c ₹2,00,000 | The bank balance increases, and the owner’s capital also increases. |
| She buys a laptop for ₹50,000 through the business bank account | Equipment A/c Dr. ₹50,000 To Bank A/c ₹50,000 | Equipment increases while the bank balance decreases. |
| She buys inventory worth ₹18,000 on credit | Inventory A/c Dr. ₹18,000 To Supplier A/c ₹18,000 | Inventory increases, and the amount becomes payable to the supplier. |
| She raises an invoice for ₹10,000 plus 18% GST on an intra-state sale | Customer A/c Dr. ₹11,800 To Sales A/c ₹10,000 To Output CGST A/c ₹900 To Output SGST A/c ₹900 | The customer owes ₹11,800. ₹10,000 is sales and ₹1,800 is GST liability. |
| She pays shop rent of ₹12,000 through the bank | Rent A/c Dr. ₹12,000 To Bank A/c ₹12,000 | Rent expense increases while the bank balance decreases. |
| The customer later pays the ₹11,800 invoice | Bank A/c Dr. ₹11,800 To Customer A/c ₹11,800 | The bank balance increases and the customer’s outstanding amount reduces. |
Transaction
Accounting Entry
To Capital A/c ₹2,00,000
Why
Transaction
Accounting Entry
To Bank A/c ₹50,000
Why
Transaction
Accounting Entry
To Supplier A/c ₹18,000
Why
Transaction
Accounting Entry
To Sales A/c ₹10,000
To Output CGST A/c ₹900
To Output SGST A/c ₹900
Why
Transaction
Accounting Entry
To Bank A/c ₹12,000
Why
Transaction
Accounting Entry
To Customer A/c ₹11,800
Why
Note: For simplicity, the inventory example records stock directly in the Inventory account. Some accounting systems use a Purchases account instead.
The 18% GST rate in the example is assumed only to explain the entry. The actual GST rate depends on the goods or services supplied. For an inter-state sale, IGST would generally apply instead of CGST and SGST.
Notice the last two entries involving the customer. The sale is recorded when Priya raises the invoice. When the customer later pays, only the Bank and Customer accounts change. Sales should not be recorded again, as that would count the same income twice.
Capital also deserves a distinction. It represents the owner’s stake in the business, not an ordinary amount payable to a supplier.
Why Your Bank Statement Can Look Reversed
Your bank statement may show a transaction as a debit even though your own books credit the Bank account. This happens because the two records show the same transaction from different points of view.
Money deposited with a bank is a liability in the bank’s own books because the bank owes that money to you. When money leaves your account, the bank’s liability falls.
In your business books, however, money held in the bank is generally an asset. When that money leaves, the asset falls, so Bank is credited.
So, do not use the words “debit” or “credit” on your bank statement to decide how to record a transaction in your own books. First look at what changed in the business.
Three Real-World Entries New Owners Often Get Wrong
Basic examples such as rent and purchases are useful for learning the rule. In practice, new business owners also come across transactions where the amount received or paid does not match the original invoice.
Payment Gateway Settlement
Suppose a customer balance of ₹1,000 has already been recorded. For illustration, assume the payment gateway sends ₹976.40 to your bank after deducting a ₹20 service fee and ₹3.60 GST on that fee.
| Account | Debit | Credit |
|---|---|---|
| Bank | ₹976.40 | |
| Payment Gateway Charges | ₹20.00 | |
| Input GST | ₹3.60 | |
| Customer | ₹1,000.00 |
Account
Debit
Credit
Account
Debit
Credit
Account
Debit
Credit
Account
Debit
Credit
The gateway deduction is separate from the customer payment. Do not record only ₹976.40 as the customer receipt. The customer has paid ₹1,000; the remaining ₹23.60 is recorded separately as the gateway fee and GST in this example.
The charges shown above are only an example and are not a standard payment-gateway rate. If GST charged on the gateway fee is not eligible for input tax credit under the applicable GST rules, its accounting treatment would also need to be adjusted.
TDS Deducted by a Customer
Suppose a customer owes you ₹50,000. For this example, assume ₹5,000 of TDS validly applies to the payment. The customer transfers ₹45,000 to your bank and deducts ₹5,000 as tax against your PAN.
| Account | Debit | Credit |
|---|---|---|
| Bank | ₹45,000 | |
| TDS Receivable | ₹5,000 | |
| Customer | ₹50,000 |
Account
Debit
Credit
Account
Debit
Credit
Account
Debit
Credit
The ₹5,000 is not a customer discount or an ordinary business expense. It represents tax deducted against your income, subject to the deduction being correctly reported.
For Tax Year 2026-27, the Income Tax Department states that the Annual Information Statement under the Income-tax Act, 2025 is available as Form No. 168. Businesses can use it to check reported tax information, including TDS.
The actual TDS rate depends on the nature of the transaction and the applicable tax provisions. The ₹5,000 amount above is only for explaining the entry.
Advance Received From a Customer
Suppose a customer pays ₹25,000 before you have supplied the goods or completed the service.
| Account | Debit | Credit |
|---|---|---|
| Bank | ₹25,000 | |
| Customer Advance | ₹25,000 |
Account
Debit
Credit
Account
Debit
Credit
Money has entered the bank, but that does not automatically mean the business has earned sales income.
This distinction is useful to remember: money received and income earned are not always the same event. The exact tax treatment of an advance can depend on the nature of the transaction.
How to Spot Possible Accounting Errors
An entry can balance and still be posted to the wrong account. These checks can help spot possible errors:
- Compare the bank balance: Match the bank balance in your books with your bank statement after allowing for normal timing differences.
- Review unusual balances: Look into customer or supplier balances that appear unexpectedly high, old or negative.
- Check negative cash: Cash in hand should not normally become negative. A negative balance may point to a missing receipt, duplicate payment or wrong date.
- Review suspense entries: If a transaction has temporarily been kept in a Suspense account, move it to the correct account once you know what it relates to.
A trial balance can still match even when a transaction has been completely omitted, entered twice or posted to the wrong account. Equal totals confirm that debits and credits balance, not that every classification is correct.
When Are Books of Account Required in 2026?
From 1 April 2026, Section 62 of the Income-tax Act, 2025 governs the general requirement to maintain books of account.
For a newly set-up business or non-specified profession, the general thresholds are expected income above ₹1,20,000 or expected sales, turnover or gross receipts above ₹10,00,000 during the tax year. For individuals and Hindu Undivided Families, these limits are higher at ₹2,50,000 and ₹25,00,000 respectively. Section 62 also covers certain other situations, so these thresholds are not the only test.
If a person who is required to maintain or retain books under Section 62 and the applicable rules fails to do so, a ₹25,000 penalty may be imposed under Section 441.
For a new owner, the practical point is simple: keep clear records of sales, purchases, payments, receipts, expenses and balances from the beginning rather than trying to reconstruct them later.
How Billing Software Helps Keep Business Records Organised
For day-to-day work, the main task is keeping invoices, payments and outstanding amounts properly recorded.
With mazu, you can create GST-ready invoices, record payments and track outstanding invoices in one place, helping you keep billing records organised as your business grows.
Conclusion
Once debit and credit are understood as two sides of an accounting entry rather than simply “money in” and “money out”, everyday transactions become much easier to read.
Start by identifying which accounts are affected. Then check whether each account increased or decreased and apply the normal rule for that account type.
You do not need to memorise every possible journal entry to understand your books. Knowing the basic pattern can help you read your ledgers, understand reports and identify transactions that may have been recorded incorrectly.