Why debits always equal credits

Two sides that must stay equal

Start from the accounting equation: assets = liabilities + equity. An asset is a present right to an economic benefit, such as cash, equipment, or an amount a customer owes (FASB Concepts Statement No. 8, Chapter 4, paragraph E16). A liability is a present obligation to transfer an economic benefit (E37). Equity is what remains of the assets after deducting the liabilities (E61, E62). Liabilities and equity together are the claims on the assets: what creditors can demand and what is left for the owners. Why assets always equal liabilities plus equity works through why the two sides are equal by definition.

Because equity is defined as the difference, the equation holds before every transaction and after it. So the change in assets must always equal the change in the claims. Split each change into what went up and what went down:

1. Change in assetsAsset increases − Asset decreases
2. =Change in liabilities and equity (claims)Claim increases − Claim decreases
3. ⇒Rearranged: debitsAsset increases + Claim decreases
4. =Rearranged: creditsClaim increases + Asset decreases

Moving each decrease to the other side gives Asset increases + Claim decreases = Claim increases + Asset decreases: debits on the left, credits on the right, always equal.

Asset increases, Asset decreases

The amounts by which a transaction raises or lowers asset accounts, in dollars.

Claim increases, Claim decreases

The amounts by which it raises or lowers liability and equity accounts (the claims on the assets), in dollars. Revenue and expense accounts are part of equity.

Read the last line. One group is increases on the left of the equation plus decreases on the right. The other group is increases on the right plus decreases on the left. Double-entry bookkeeping gives those two groups names. A debit is an increase in an asset or a decrease in a liability or equity account. A credit is an increase in a liability or equity account or a decrease in an asset. So "total debits equal total credits" is not an extra rule laid on top of the equation. It is the equation itself, written as a list of changes.

Grant's video on debits and credits puts it the same way: split the equation in two, and the left side has a natural debit balance while the right side has a natural credit balance. An account's normal balance is simply the side that increases it. Assets increase with debits because they sit on the left. Liabilities and equity increase with credits because they sit on the right. "Debit" means the left column of an account. It does not mean good, bad, or "money out".

Revenue and expenses follow from equity

Revenue and expense accounts are not a third side of the equation. They are temporary parts of equity that show why equity changed during a period.

Revenue is an inflow of assets or a settlement of liabilities from doing the business's work (E80). Taken by itself, it raises assets relative to liabilities, so it raises equity. Equity increases with a credit, so revenue is recorded as a credit. An expense is an outflow of assets or a new liability from the same work (E81). It lowers equity, so it is recorded as a debit. That is why an expense and an asset both sit on the debit side even though one is a cost and the other a resource: an asset increase raises the left side, and an expense lowers the right side, and both are debits by the definition above.

A worked example

This example is hypothetical. Birch Tutoring starts with nothing and records six transactions in its first month. The table sorts each line of each entry into the four kinds of change from the formula.

Check the totals. Debits: 20,000 + 10,000 + 6,000 + 5,000 + 1,800 + 2,000 = $44,800. Credits: 20,000 + 10,000 + 6,000 + 5,000 + 1,800 + 2,000 = $44,800. Each row balances on its own, so the month balances too.

The rows show the main ways a transaction keeps the equation in balance. Rows 1, 2 and 4 raise both sides. Row 3 swaps one asset for another, so one asset is debited and another credited and the totals do not move. Row 5 lowers both sides: cash leaves and equity falls through an expense. Row 6 also lowers both sides. (The one pattern missing is a swap between claims, such as a lender accepting shares in place of a loan: a liability is debited and equity credited.) Row 6 is the row that confuses people most, because a debit appears with no asset coming in:

Account	Debit	Credit
Loan payable (liability)	$2,000
Cash (asset)		$2,000
Totals	$2,000	$2,000

A liability falls, so it is debited. An asset falls, so it is credited. Both sides of the equation drop by $2,000.

The loan is a claim on the right side, so making it smaller is a debit. Row 4 is the opposite surprise: revenue with no cash at all.

Account	Debit	Credit
Accounts receivable (asset)	$5,000
Tutoring revenue (equity)		$5,000
Totals	$5,000	$5,000

No cash moves. An asset rises and equity rises by the same $5,000, so the entry balances.

The trial balance at month-end

Post the entries to each account and list the balances. Debit-balance accounts go in one column, credit-balance accounts in the other.

Debit balances: 20,200 + 5,000 + 6,000 + 1,800 = $33,000. Credit balances: 8,000 + 20,000 + 5,000 = $33,000. Now read the same balances as the equation. Assets are 20,200 + 5,000 + 6,000 = $31,200. Liabilities are $8,000. Equity is capital plus revenue minus expense: 20,000 + 5,000 − 1,800 = $23,200. And 8,000 + 23,200 = $31,200. The trial balance is the accounting equation with the expense moved to the other side.

Where this applies

Recording any transaction. Ask two questions: which accounts changed, and did each one go up or down? An asset going up or a claim going down is a debit. A claim going up or an asset going down is a credit. If the two sides of the entry do not match, a change has been missed.

Reading a bank statement. A bank statement says your deposit "credits" your account, which looks backwards. It is not. The statement is written from the bank's books. In your books the money in the bank is an asset, so a deposit is a debit to cash. In the bank's books your balance is money it owes you, a liability: the Federal Reserve's balance sheet of US commercial banks lists deposits under liabilities (H.8 release, Table 1, line 34). A liability increases with a credit, so the bank credits your account. Both records are right; they are kept by different entities.

Checking work. A trial balance whose columns do not agree means something was recorded on one side only: an amount posted to one side but not the other, one side of an entry posted twice, or a balance added wrongly. Recording a complete entry twice would not show up here, because both sides double.

A common misconception

The most common mistake is to read debit as "decrease" or "money out" and credit as "increase" or "money in". Row 3 debits equipment because an asset went up. Row 6 debits the loan because a liability went down. A debit is a side, and whether it raises or lowers an account depends on which side of the equation the account sits on.

A second mistake is to think a balanced trial balance proves the books are right. Debiting equipment instead of rent expense in row 5 would still balance. So would forgetting row 6 altogether. A balanced trial balance shows only that total recorded debit balances equal total recorded credit balances. It does not prove that each entry balanced or was correct: two one-sided errors of the same amount, one on each side, would offset and leave the totals equal.

Where the principle stops

Some accounts carry the opposite balance on purpose. A contra account sits on one side of the equation but carries the other side's normal balance, because it reduces the account it is paired with. Accumulated depreciation is a credit balance that reduces equipment on the asset side. Treasury stock is a debit balance that reduces equity, as why treasury stock reduces equity shows. The identity still holds; the contra account simply subtracts from its side.

Debits and credits are a recording convention, not a standard. FASB's Conceptual Framework defines assets, liabilities, equity, revenue and expenses. It does not prescribe journal entries, and Concepts Statements are not part of the Codification and do not change or interpret US GAAP (Concepts Statement No. 8, Chapter 4, Appendix A, paragraph A1). Debits and credits only record changes; when a revenue or an expense is recognized, and at what amount, is decided by the standards.

A balanced entry is not a correct entry. The equation constrains how changes are recorded, not which changes happened. Judging whether an item is an asset or an expense still takes the definitions and the standards.