Debits and credits cheat sheet

For most of my career, I have kept a sticky note on my laptop with a reminder of how debits and credits work. I want to save you the trouble (and the side-eye glances) by sharing a debits and credits cheat sheet that will help you understand and remember the basics of this accounting concept.

What are Debits and Credits?

Debits and credits are the building blocks of accounting. Think of them as the “in” and “out” doors of your money flow. When you debit business accounts account, you’re essentially adding to it. When you credit an account, you’re taking something away. Simple, right? But before you start thinking this is a walk in the park, hang tight, there’s more to the story.

The three financial statements

• The balance sheet is a snapshot at a single moment. Assets on one side, liabilities and equity on the other, and the two sides have to agree or something is wrong.
• The income statement, or P&L, covers a period rather than a moment. Revenue, minus what it cost to earn it, equals profit. It answers whether the business made money, not whether it has any.
• The cash flow statement tracks money moving, split into operating, investing and financing. It is the one that catches a profitable company running out of cash, which happens more often than people expect.

The accounting equation

Here’s where we get to the heart of finance: the fundamental rule that keeps everything balanced. It’s the basic accounting equation:

Assets = Liabilities + Equity

In layman’s terms, what you own (assets account) is always equal to what you owe (liabilities) plus what’s left over (equity). If you mess this up, your financial reports will look as stable as a house of cards in a windstorm.

Debits vs. Credits

Now, let’s break down debits and credits with some easy-to-digest analogies:

• A debit goes on the left. It increases assets and expenses, and decreases liabilities, equity and revenue.
• A credit goes on the right and does the opposite. Every entry has both, and they have to be equal, which is the whole of double-entry in one sentence.

But wait, there’s a twist. In accounting, debits and credits aren’t just about adding or subtracting cash. They can increase or decrease different types of accounts:

Account type	A debit	A credit	In practice
Asset	Increases	Decreases	Cash coming in is a debit. Cash going out is a credit.
Liability	Decreases	Increases	Taking on debt is a credit. Paying it down is a debit.
Equity	Decreases	Increases	Profit or investment in is a credit. Owner payouts are a debit.
Revenue	Decreases	Increases	Making a sale is a credit. A sales return is a debit.
Expense	Increases	Decreases	Paying a bill is a debit. A refund received is a credit.

So, why does this matter? Because every financial move you make (whether it’s buying a latte or securing a million-dollar investment) impacts your accounts in specific ways. Understanding these impacts will help you keep everything in balance and avoid nasty surprises when it’s time to close the books.

Got it? Great. Now, let’s dive deeper into how this all plays out in the real world.

The only Debits and Credits cheat sheet you need

Before you read another line, download this debit and credit cheat sheet and keep it close by. It’ll be your trusty companion as you navigate the world of accounting. And don’t worry, no one will know it’s not from your memory, we won’t tell.

The fundamentals of Double-Entry Accounting

Double-entry bookkeeping is the reason your books don’t look like a scene from a disaster movie. The core idea is simple yet genius, every financial transaction affects at least two accounts. Think of it as the Newton’s Third Law of finance: for every debit, there’s an equal and opposite credit. This balance ensures that your financial statements are always in harmony.

When you make a transaction, one account gets debited (added to) and another gets credited (subtracted from). It’s like a delicate dance, ensuring that everything stays perfectly balanced, as all things should be.

Account types

Now, let’s break down the main types of accounts you’ll deal with when recording financial transactions:

Assets

Assets: These are the goodies your business owns and they sit on the balance sheet. Cash in your bank account, inventory, vehicles, property, you name it, if it’s yours and has value, it’s an asset.

Example: You buy office supplies worth $500. Your Office Supplies (asset account) goes up by $500 (debit), and your Cash (another asset account) goes down by $500 (credit).

Liability and Equity Accounts

Equity represents your stake in the business. It’s what’s left over after liabilities are deducted from assets, essentially, it’s your net worth in the business.

Liabilities: These are what you owe, your financial obligations. Loans, accounts payable (money you owe suppliers), mortgages.

Example: You take out a loan of $10,000. Your Bank Loan (liability account) goes up by $10,000 (credit), and your Cash (asset account) goes up by $10,000 (debit).

Owner’s Capital: Money invested by owners.

Example: You invest $5,000 into your business. Your Owner’s Capital (equity account) increases by $5,000 (credit), and your Cash (asset account) increases by $5,000 (debit).

Retained Earnings: Profits that are reinvested into the business rather than paid out as dividends.

Example: At the end of the year, your business has a profit of $20,000. Your Retained Earnings (equity account) increases by $20,000 (credit), and your Revenue (revenue account) increases by $20,000 (debit).

Revenue and Expenses

Revenue and expenses track your earnings and what you spend to earn those revenues.

Revenue: This is the money you make from selling goods or services.

Example: You sell products worth $2,000. Your Sales (revenue account) goes up by $2,000 (credit), and your Accounts Receivable (asset account) goes up by $2,000 (debit).

Expenses: These are the costs incurred to earn revenue. Things like rent, utilities, salaries, and cost of goods sold (COGS).

Example: You pay $1,200 in rent. Your Rent Expense (expense account) increases by $1,200 (debit), and your Cash (asset account) decreases by $1,200 (credit).

Step-by-Step walkthrough, recording transactions

Alright, let’s roll up our sleeves and make double-entry accounting feel as simple as a Sunday morning. We’re going to walk through this step-by-step, so you can see exactly how it’s done with real-world scenarios.

Step 1, identify the transaction

First things first, you need to know what transaction you’re dealing with. Here are some classic examples:

Purchasing Inventory: You bought $1,000 worth of inventory for your store.

Paying Salaries: It’s payday, and you’re doling out $5,000 in employee salaries.

Receiving a Loan: The bank just approved your $10,000 loan.

Recording a Sale: You sold goods worth $2,500 to a customer.

Step 2, determine the Accounts affected

Next, figure out which accounts are involved and whether they’re increasing or decreasing. Here’s the lowdown:

Purchasing Inventory:

Inventory (Asset) increases by $1,000.

Cash (Asset) decreases by $1,000.

Paying Salaries:

Salaries Expense (Expense) increases by $5,000.

Cash (Asset) decreases by $5,000.

Receiving a Loan:

Cash (Asset) increases by $10,000.

Bank Loan Payable (Liability) increases by $10,000.

Recording a Sale:

Accounts Receivable (Asset) increases by $2,500.

Sales Revenue (Revenue) increases by $2,500.

Step 3, apply the Debit and Credit rules

Now for the fun part, applying the debit and credit rules. Remember, every transaction affects at least two accounts, and the debit balances and credit balances must match:

1. Purchasing Office Supplies

• You bought $300 worth of office supplies.
• Debit Office Supplies: $300 (increase in asset)
• Credit Cash: $300 (decrease in asset)

Office Supplies $300 (Debit)

Cash $300 (Credit)

2. Receiving a Loan from a Bank

• The bank gives you a $10,000 loan.
• Debit Cash: $10,000 (increase in asset)
• Credit Bank Loan: $10,000 (increase in liability)

Cash $10,000 (Debit)

Bank Loan $10,000 (Credit)

3. Paying Employee Salaries

• You’ve paid out $5,000 in salaries.
• Debit Salaries Expense: $5,000 (increase in expense)
• Credit Cash: $5,000 (decrease in asset)

Salaries Expense $5,000 (Debit)

Cash $5,000 (Credit)

4. Recording a Sale

• You made a sale worth $2,500.
• Debit Accounts Receivable: $2,500 (increase in asset)
• Credit Sales Revenue: $2,500 (increase in revenue)

Accounts Receivable $2,500 (Debit)

Sales Revenue $2,500 (Credit)

Worked examples

Three worked examples. These are illustrations rather than clients, so the numbers are made up and the mechanics are not. Whether you’re managing a cozy coffee shop, overseeing finances for a manufacturing company, or just trying to keep your personal budget on track, these scenarios will show you how to use debits and credits in the real world.

Small business scenario, recording daily transactions at One Store

These run on F9 Coffee Co., the seven-store chain I use for teaching, so the account names below are the ones in its actual chart of accounts. Three ordinary days at one store:

Example 1: Purchasing Ingredients

• Scenario: You buy $500 worth of coffee beans.
• Debit Inventory (Asset): $500
• Credit Cash (Asset): $500

Inventory $500 (Debit)

Cash $500 (Credit)

Example 2: Sales Transaction

• Scenario: A customer buys a cappuccino for $5, paying in cash.
• Debit Cash (Asset): $5
• Credit Sales Revenue (Revenue): $5

Cash $5 (Debit)

Sales Revenue $5 (Credit)

Example 3: Paying Utility Bills

• Scenario: You pay $200 for the month’s electricity bill.
• Debit Account Utilities Expense (Expense): $200
• Credit Entry Cash (Asset): $200

Utilities Expense $200 (Debit)

Cash $200 (Credit)

Corporate finance scenario, handling transactions at the Roastery

The Long Island City site is a roastery as well as a cafe, and it supplies beans to the six other stores. That gives it three entries a retail store never sees, and the chart of accounts carries a line for the third one: account 4200, Wholesale Revenue, Internal.

Example 1: Purchasing Raw Materials

• Scenario: You buy $10,000 of green coffee from an importer, on 30-day terms.
• Debit Green Coffee Inventory (Asset): $10,000
• Credit Accounts Payable (Liability): $10,000

Green Coffee Inventory $10,000 (Debit)

Accounts Payable $10,000 (Credit)

Example 2: Recording a Sale To Income Accounts

• Scenario: You ship $25,000 of roasted beans to the other six stores, billed internally.
• Debit Accounts Receivable (Asset): $25,000
• Credit Sales Revenue (Revenue): $25,000

Accounts Receivable $25,000 (Debit)

Sales Revenue $25,000 (Credit)

Example 3: Repaying a Loan

• Scenario: You repay $5,000 of a bank loan.
• Debit Bank Loan (Liability): $5,000
• Credit Cash Bank Account (Asset): $5,000

Bank Loan $5,000 (Debit)

Cash Account $5,000 (Credit)

Debits and Credits in the digital age

Forget the days of dusty ledgers and endless columns of numbers. We’re living in the golden age of digital accounting where tech does the heavy lifting, and you get to focus on what really matters, growing your business and living your best financial life. Let’s get into how modern technology is changing the world of debits and credits.

Accounting software, automating the process

Gone are the days of manual entries when. financial transaction occurs and balancing books by hand. Today, we have a long list of accounting software options that do the arithmetic for you and keep the entries consistent. Three worth knowing:

1. QuickBooks

• QuickBooks covers the widest ground of the three, from invoicing and payroll to expense tracking and reporting. It is the default for a reason, and the reason is coverage rather than elegance.
• You do not need an accounting background to run it, and the bank feed connections are the most reliable of the three, which matters more day to day than any feature list.

2. Xero

• Xero does most of what QuickBooks does with a cleaner interface, and it is the one people tend to prefer once they have used both.
• Automated bank feeds, invoicing and current reporting, aimed squarely at small businesses and startups rather than at accountants.

3. FreshBooks

• FreshBooks is built for freelancers and one-person businesses, and it is deliberately narrower than the other two.
• Invoicing, time tracking and expenses are the whole product, which is exactly right if you bill by the hour and wrong if you need inventory.

Where AI has taken over

Now the part that has changed most: AI and automation. These are doing real work in accounting teams; they’re transforming the way we handle financial data.

1. Automated Data Entry

• Receipt and invoice capture reads the document and writes the transaction into your accounting system, which removes the single most tedious job in bookkeeping.
• It is worth checking the first month of coded transactions rather than trusting it straight away. The errors it makes are different from the ones a person makes, so they are easy to miss.

2. Predictive Analytics

• Forecasting tools read your history and project it forward, which is useful for spotting a trend and unreliable for anything that depends on a decision nobody has made yet.
• Predictive analytics can flag a problem while there is still time to do something about it, which is the whole argument for looking forward rather than reporting backward.

3. Real-Time Financial Insights

• Current-position reporting keeps your cash and expense view up to date without anyone rebuilding a file, which is the difference between checking cash weekly and checking it whenever you want.
• The value is in the decisions you make sooner, not in the dashboard itself. A number nobody looks at on a Tuesday is not worth automating.

Have any questions? Are there other topics you would like us to cover? Leave a comment below and let us know! Also, remember to subscribe to our Newsletter to receive exclusive financial news in your inbox. Thanks for reading, and happy learning!

What it still cannot do, and why that matters here

Automated entry and predictive analytics are real and they are in production. What has not moved is the bit this page is about.

A tool that reads an invoice and proposes a journal entry is making a judgment about which account it belongs in. It is usually right and it is confidently wrong often enough to matter, and the only way to catch that is to know which side of the entry the number should have landed on. Debits and credits stopped being the work and became the review.

Which is an argument for knowing this cold rather than against it. If you are approving entries you did not make, you need the mechanics faster than the person who made them.

For what that looks like across a whole close rather than one entry, automating the month-end close covers the process, and AI in finance is the wider map.