In accounting, credit, and debit are terms used to indicate the effect of a transaction on different types of accounts. These terms are fundamental to the double-entry accounting system, where each transaction involves at least two accounts and has equal and opposite effects on those accounts.

Here’s an explanation of credit vs. debit in accounting

1. Debit

• Debit entries increase asset accounts and decrease liability and equity accounts.
• Debit entries are recorded on the left side of a T-account or ledger account.

Examples of debit entries include…

• Recording an increase in cash received from a customer (debit Cash account).
• Recording a decrease in inventory due to a sale (debit Cost of Goods Sold account).
• Recording an increase in equipment purchased on credit (debit Equipment account).

2. Credit

• Credit entries increase liability and equity accounts and decrease asset accounts.
• Credit entries are recorded on the right side of a T-account or ledger account.

Examples of credit entries include…

• Recording an increase in accounts payable for purchases made on credit (credit Accounts Payable account).
• Recording a decrease in retained earnings due to dividend payments (credit Retained Earnings account).
• Recording an increase in revenue earned from sales (credit Sales Revenue account).

In summary

• Debit represents an increase in assets or a decrease in liabilities and equity.
• Credit represents a decrease in assets or an increase in liabilities and equity.

Note that the terms “debit” and “credit” do not always correspond to increases or decreases in the positive sense. For example, while a debit to an asset account increases the asset balance (which is considered positive), a credit to a liability account increases the liability balance (which is also considered positive). Understanding the rules of debits and credits is necessary for recording transactions accurately and maintaining the balance of the accounting equation (Assets = Liabilities + Equity).