Debits and credits explained simply, without memory tricks

The situation

On her second day at Crescent Holding, Farida sits with Yousef, the chief accountant. He hands her a journal entry from Palm Gate Logistics and asks her to say, without looking anything up, which side the bank account goes on. She freezes. At university she memorised a rhyme about debits and credits, and in front of a real entry the rhyme is gone.

This article replaces the rhyme with one picture and one rule. After it you can read any entry and check that it is right.

The explanation

Start with the plain meaning. Debit means the left side of an account. Credit means the right side. That is all. Neither word means good or bad, increase or decrease. Whether a debit raises or lowers an account depends on the type of account.

Every business item belongs to one of five types. The IFRS Conceptual Framework calls them the elements of financial statements: assets, liabilities, equity, income and expenses. The accounting equation links them: assets equal liabilities plus equity. Income and expenses are movements in equity, because profit sits inside equity.

Now the picture. The equation has assets on the left and liabilities plus equity on the right. Keep each account on its natural side:

Assets and expenses sit on the left, so a debit increases them and a credit decreases them.
Liabilities, equity and income sit on the right, so a credit increases them and a debit decreases them.

The one rule that never changes is double entry: every transaction is recorded twice, and the total of the debits equals the total of the credits. If your entry does not balance, it is wrong, whatever the accounts are.

A practical way to build an entry is to ask three questions. Which two accounts are touched? Is each one rising or falling? Is each one on the left or the right side of the equation? The answers give you the debit and the credit.

Notice what this removes. You do not memorise a list of transactions. You identify the account types once and the sides follow. The bank account is an asset, so money in is a debit and money out is a credit. That is why a bank statement, which is the bank's view, shows your deposit as a credit: for the bank, you are a liability.

Worked example

This is a small illustration, separate from the Palm Gate September pack. Four events happen in one week at Palm Gate Logistics, in AED.

First, Palm Gate invoices a customer AED 15,000 for transport. Receivables (an asset) rise, so debit receivables; income rises, so credit revenue.

Second, the customer pays AED 15,000. Bank (an asset) rises, so debit bank; receivables fall, so credit receivables.

Third, Palm Gate pays AED 4,000 for fuel from the bank. Fuel (an expense) rises, so debit fuel expense; bank falls, so credit bank.

Fourth, Palm Gate borrows AED 20,000 from its bank. Bank rises, so debit bank; a loan (a liability) rises, so credit the loan.

After the four entries the balances are: bank 31,000 debit, receivables nil, fuel expense 4,000 debit, revenue 15,000 credit, loan 20,000 credit.

Debits total 35,000 and credits total 35,000, so the trial balance agrees. The equation also holds: assets of 31,000 equal liabilities of 20,000 plus equity of 11,000, where the equity is profit of 15,000 revenue less 4,000 fuel.

Notice the bank account was debited twice and credited once. Debit did not mean increase for every account: it increased the bank, and it would have decreased the loan if Palm Gate had repaid it.

The common mistake

The common mistake is to learn that debit means increase and credit means decrease. It works for the bank account and breaks for the loan, for revenue and for equity. It also misleads people who read bank statements, where a credit is money arriving in your account but an increase in the bank's liability to you.

A second mistake is to believe that a balanced entry is a correct entry. A debit of AED 4,000 against a credit of AED 4,000 balances, but if the debit went to the wrong expense account, the books are still wrong. Balance proves the arithmetic, not the judgement. Always ask whether the right accounts were chosen.

The fix for both is the same: name the account type first, then decide the side.

Checklist

I name the account type of both sides before I choose debit or credit.
Assets and expenses are debited to increase; liabilities, equity and income are credited to increase.
Debits equal credits on every entry I post.
I check the entry against the accounting equation after posting.
I ask whether the accounts chosen are the right ones, not only whether the entry balances.
I read bank statements as the bank's view, so a credit is money in for me.

Go further

Watch the full episode ACC-E3 Debits and credits without memory tricks and practise in the lesson ACC-E3 Debits and credits without memory tricks, which has worked entries you can complete yourself.

Companies and figures in this article are fictional. Masar-Fintech is independent and not affiliated with any professional body or tax authority.