Debits and Credits Explained: The Rules, With a Cheat Sheet

Debit and credit are the two sides of every ledger entry. A debit is not "bad" and a credit is not "good" — they are directions, like left and right. Which direction increases an account depends only on the account's type, and once you know the five types, the rules stop being memorization and become mechanics.

The cheat sheet

Account type	Increases with	Decreases with	Normal balance
Asset	Debit	Credit	Debit
Expense	Debit	Credit	Debit
Liability	Credit	Debit	Credit
Equity	Credit	Debit	Credit
Income	Credit	Debit	Credit

Two groups, mirror images of each other:

• Debit-normal accounts — assets and expenses. These represent value the business holds or has consumed. More of them = more debits.
• Credit-normal accounts — liabilities, equity, and income. These represent where value came from: lenders, owners, customers. More of them = more credits.

That split isn't arbitrary. It restates the accounting equation: assets (debit side) equal liabilities plus equity (credit side), and income and expenses are the period's changes to equity, kept in their own accounts until closing.

Why the rules feel backwards

The common confusion comes from bank statements. Your bank statement shows a salary arriving as a "credit" — yet in your own books, money arriving at the bank is a debit to the bank account.

Both are correct, because they are written from different perspectives. The bank's statement is a page of the bank's ledger, where your balance is the bank's liability — money it owes you. When your balance grows, the bank's liability grows, and liabilities grow with credits. In your ledger the same balance is an asset, and assets grow with debits. Same event, opposite sides, no contradiction.

Reading an entry with the rules

A sales invoice for 1,000 € plus 21% VAT, using Lithuanian chart codes:

Account	Type	Debit	Credit
2410 Trade receivables	Asset	1,210
5001 Service revenue	Income		1,000
4492 VAT payable	Liability		210

Apply the table mechanically: an asset grew (debit), income grew (credit), a liability to the tax authority grew (credit). Debits 1,210 = credits 1,210. Every entry in double-entry bookkeeping reads this way — there is no entry whose meaning you cannot decode from account types and sides.

Paying a supplier 121 €:

Account	Type	Debit	Credit
4430 Trade payables	Liability	121
2710 Bank	Asset		121

A liability shrank (debit), an asset shrank (credit). Note that debits are not "money out" — here the debit reduces a debt. Directions, not judgments.

Contra accounts: the deliberate exceptions

Some accounts carry the opposite of their class's normal balance, on purpose. The classic one is accumulated depreciation (e.g. 1229, machinery depreciation): it sits among assets but has a credit balance, offsetting the equipment's cost so the balance sheet can show both what was paid and how much has been written off. Sales discounts and returns similarly offset income with a debit balance. If a balance looks "wrong-sided", check whether the account is a contra account before assuming an error — a trial balance shows normal and contra balances side by side.

Debit and credit in practice

Three habits that prevent most posting mistakes:

1. Name the two sides before the amounts. "What did the business receive, what did it give?" — then map each to an account type, then apply the table.
2. Never think in "plus and minus". An entry that credits the bank and debits an expense involves no negative numbers; each line is positive, on one side or the other. Negative amounts in a ledger line are almost always a modeling error.
3. Check the normal balance when reviewing. An expense account with a credit balance or a payables account with a debit balance is either a contra situation, a prepayment — or a mistake worth chasing.

In Nordlet every ledger line carries explicit debit and credit fields, and every account has a declared type (asset, liability, equity, income, expense) — so the general ledger can always be read with the cheat sheet above, and POST /v1/ledger/journal/transactions/create rejects any entry whose sides don't balance. Reports like the trial balance and financial statements derive sign conventions from the account type, never from convention in someone's head.

FAQ

What is the difference between a debit and a credit?

They are the two sides of a ledger entry. A debit increases assets and expenses and decreases liabilities, equity and income; a credit does the exact opposite. Neither means gain or loss by itself — the meaning comes from the account it lands on.

Why does my bank statement show deposits as credits?

Because the statement is written from the bank's perspective, where your balance is the bank's liability. Liabilities increase with credits. In your own books the same deposit is a debit to your bank asset account. Both entries are correct in their own ledgers.

Is a debit always money going out?

No — that's a card-terminology habit, not accounting. A debit can be money arriving at the bank (asset up), a debt being paid off (liability down), or an expense being recorded. Debits and credits are directions defined per account type, not descriptions of cash flow.

What is a normal balance?

The side on which an account's balance normally sits: debit for assets and expenses, credit for liabilities, equity and income. Contra accounts deliberately carry the opposite side — accumulated depreciation is an asset-class account with a credit balance.

How do I remember which accounts increase with a debit?

Assets and expenses — what the business holds and what it has used up — grow with debits; everything that represents a source of value (liabilities, equity, income) grows with credits. If you remember that debits = "where value went" and credits = "where value came from", the table reconstructs itself.