Double-Entry Bookkeeping: Debit and Credit Rules with Examples

Last reviewed: July 2026.

Double-entry bookkeeping records every transaction with equal debit and credit effects. The system preserves the accounting equation and creates the ledger balances used to prepare financial statements.

Debits do not always mean increases and credits do not always mean decreases. The effect depends on the type of account.

Debit and credit rules

Account type	Increase	Decrease	Normal balance
Assets	Debit	Credit	Debit
Liabilities	Credit	Debit	Credit
Equity	Credit	Debit	Credit
Income	Credit	Debit	Credit
Expenses	Debit	Credit	Debit
Drawings or owner distributions	Debit	Credit	Debit

Connection to the accounting equation

Assets = liabilities + equity. Income increases equity, expenses decrease equity and owner distributions decrease equity.

Double entry records both sides of each economic change so the equation remains balanced.

Debit does not mean bad

A debit can increase cash, inventory, equipment or an expense. A credit can increase a liability, capital or revenue. The words identify sides of accounts, not positive and negative economic meaning.

Cash capital example

An owner introduces 10,000 CU:

• Debit cash 10,000 CU
• Credit capital 10,000 CU

Credit purchase example

Inventory costing 3,000 CU is purchased on credit:

• Debit inventory 3,000 CU
• Credit trade payables 3,000 CU

Cash sale example

Goods are sold for 2,000 CU cash and cost 1,100 CU:

• Debit cash 2,000 CU
• Credit sales revenue 2,000 CU
• Debit cost of sales 1,100 CU
• Credit inventory 1,100 CU

Inventory systems often generate the second entry automatically.

Credit sale and collection

A credit sale creates a receivable. Later cash collection reduces the receivable:

• Sale: debit receivables; credit revenue
• Collection: debit cash; credit receivables

Collection does not record revenue twice.

Expense incurred but unpaid

Electricity expense of 800 CU is unpaid at year end:

• Debit electricity expense 800 CU
• Credit accrued liability 800 CU

This applies accrual accounting rather than cash accounting.

Prepayment example

Insurance paid in advance creates an asset for the unused period:

• Payment: debit prepaid insurance; credit cash
• Monthly use: debit insurance expense; credit prepaid insurance

Depreciation entry

• Debit depreciation expense
• Credit accumulated depreciation

The asset's cost account normally remains unchanged until disposal.

Loan receipt and repayment

Receiving a loan increases cash and liabilities. Repayment of principal reduces the liability, while interest is a finance expense.

• Loan received: debit cash; credit loan liability
• Principal repaid: debit loan liability; credit cash
• Interest paid: debit finance cost; credit cash

Owner drawings

Drawings are debited to an owner account and credited to cash or another asset. They do not reduce profit because they are distributions to the owner.

Journals and ledgers

A journal explains the transaction and accounts affected. The ledger collects all entries for each account and produces balances.

Review the ledger accounts guide.

Trial balance

The trial balance lists debit and credit balances. Equal totals confirm arithmetic equality but cannot detect every error, such as omission, wrong account classification or equal incorrect amounts.

See the trial balance worked example.

Compound entries

A transaction can affect more than two accounts, provided total debits equal total credits. Payroll can debit multiple expense accounts and credit tax, benefit and cash liabilities.

Contra entries

Transfers between cash and bank affect two asset accounts. In a cash book they may be marked as contra entries to prevent duplicate external posting.

Reversing entries

Some accruals are reversed at the start of the next period to simplify invoice processing. Reversals are a workflow technique and do not change the need for correct recognition.

Error correction

Correct an error using an entry that removes the wrong effect and records the right one. Do not edit completed-period records without an audit trail.

Computerised double entry

Modern systems create many entries behind invoices and payment screens. The principles remain identical, and users should understand the generated debits and credits.

Use the accounting software controls guide.

Worked bookkeeping chain

The accounting process guide and the practical bookkeeping example show how source documents become ledgers, an adjusted trial balance and financial statements.

Opening and closing entries

Permanent asset, liability and equity balances carry forward to the next period. Income and expense accounts are closed into retained earnings or owner capital through the reporting process.

Sales tax and VAT entries

Indirect tax collected from customers is normally a liability rather than revenue. Recoverable input tax is recorded separately according to local tax rules, so gross invoice cash does not equal accounting income.

Payroll double entry

Payroll can debit wage and benefit expenses and credit employee net pay, tax, pension and other liabilities. Payment later clears the liabilities rather than recording the expense again.

Bad debt and allowance entries

A write-off reduces the customer balance and related allowance or expense. An expected credit loss allowance is a contra asset estimated separately from specific customer cash receipts.

Turn debit and credit rules into practical entries

Download the free Bookkeeping Starter Pack for a reconciled worked example plus journal, ledger and trial-balance worksheets in PDF and Excel.

Download the free Bookkeeping Starter Pack

Control checklist

• identify the economic event;
• select the correct account types;
• determine increases and decreases;
• confirm total debits equal credits;
• use clear journal descriptions;
• attach supporting evidence;
• review unusual and manual entries.

Common mistakes

• assuming every debit is an expense;
• recording cash receipts as revenue automatically;
• recording loan principal as an expense;
• treating asset purchases as immediate expenses;
• forgetting the inventory cost entry;
• posting unequal compound entries;
• assuming software removes the need to understand double entry.

Key takeaway

Double entry records the complete economic effect of each transaction. Learn the account-type rules, follow the accounting equation and verify that every journal has equal debits and credits.

Official learning references: ACCA accounting equation, ACCA accounting principles and duality, and ACCA computerised accounting systems.

Last reviewed: July 2026.

Double-entry bookkeeping records every transaction with equal debit and credit effects. The system preserves the accounting equation and creates the ledger balances used to prepare financial statements.

Debits do not always mean increases and credits do not always mean decreases. The effect depends on the type of account.

Debit and credit rules

Account type	Increase	Decrease	Normal balance
Assets	Debit	Credit	Debit
Liabilities	Credit	Debit	Credit
Equity	Credit	Debit	Credit
Income	Credit	Debit	Credit
Expenses	Debit	Credit	Debit
Drawings or owner distributions	Debit	Credit	Debit

Connection to the accounting equation

Assets = liabilities + equity. Income increases equity, expenses decrease equity and owner distributions decrease equity.

Double entry records both sides of each economic change so the equation remains balanced.

Debit does not mean bad

A debit can increase cash, inventory, equipment or an expense. A credit can increase a liability, capital or revenue. The words identify sides of accounts, not positive and negative economic meaning.

Cash capital example

An owner introduces 10,000 CU:

• Debit cash 10,000 CU
• Credit capital 10,000 CU

Credit purchase example

Inventory costing 3,000 CU is purchased on credit:

• Debit inventory 3,000 CU
• Credit trade payables 3,000 CU

Cash sale example

Goods are sold for 2,000 CU cash and cost 1,100 CU:

• Debit cash 2,000 CU
• Credit sales revenue 2,000 CU
• Debit cost of sales 1,100 CU
• Credit inventory 1,100 CU

Inventory systems often generate the second entry automatically.

Credit sale and collection

A credit sale creates a receivable. Later cash collection reduces the receivable:

• Sale: debit receivables; credit revenue
• Collection: debit cash; credit receivables

Collection does not record revenue twice.

Expense incurred but unpaid

Electricity expense of 800 CU is unpaid at year end:

• Debit electricity expense 800 CU
• Credit accrued liability 800 CU

This applies accrual accounting rather than cash accounting.

Prepayment example

Insurance paid in advance creates an asset for the unused period:

• Payment: debit prepaid insurance; credit cash
• Monthly use: debit insurance expense; credit prepaid insurance

Depreciation entry

• Debit depreciation expense
• Credit accumulated depreciation

The asset's cost account normally remains unchanged until disposal.

Loan receipt and repayment

Receiving a loan increases cash and liabilities. Repayment of principal reduces the liability, while interest is a finance expense.

• Loan received: debit cash; credit loan liability
• Principal repaid: debit loan liability; credit cash
• Interest paid: debit finance cost; credit cash

Owner drawings

Drawings are debited to an owner account and credited to cash or another asset. They do not reduce profit because they are distributions to the owner.

Journals and ledgers

A journal explains the transaction and accounts affected. The ledger collects all entries for each account and produces balances.

Review the ledger accounts guide.

Trial balance

The trial balance lists debit and credit balances. Equal totals confirm arithmetic equality but cannot detect every error, such as omission, wrong account classification or equal incorrect amounts.

See the trial balance worked example.

Compound entries

A transaction can affect more than two accounts, provided total debits equal total credits. Payroll can debit multiple expense accounts and credit tax, benefit and cash liabilities.

Contra entries

Transfers between cash and bank affect two asset accounts. In a cash book they may be marked as contra entries to prevent duplicate external posting.

Reversing entries

Some accruals are reversed at the start of the next period to simplify invoice processing. Reversals are a workflow technique and do not change the need for correct recognition.

Error correction

Correct an error using an entry that removes the wrong effect and records the right one. Do not edit completed-period records without an audit trail.

Computerised double entry

Modern systems create many entries behind invoices and payment screens. The principles remain identical, and users should understand the generated debits and credits.

Use the accounting software controls guide.

Worked bookkeeping chain

The accounting process guide and the practical bookkeeping example show how source documents become ledgers, an adjusted trial balance and financial statements.

Opening and closing entries

Permanent asset, liability and equity balances carry forward to the next period. Income and expense accounts are closed into retained earnings or owner capital through the reporting process.

Sales tax and VAT entries

Indirect tax collected from customers is normally a liability rather than revenue. Recoverable input tax is recorded separately according to local tax rules, so gross invoice cash does not equal accounting income.

Payroll double entry

Payroll can debit wage and benefit expenses and credit employee net pay, tax, pension and other liabilities. Payment later clears the liabilities rather than recording the expense again.

Bad debt and allowance entries

A write-off reduces the customer balance and related allowance or expense. An expected credit loss allowance is a contra asset estimated separately from specific customer cash receipts.

Control checklist

• identify the economic event;
• select the correct account types;
• determine increases and decreases;
• confirm total debits equal credits;
• use clear journal descriptions;
• attach supporting evidence;
• review unusual and manual entries.

Common mistakes

• assuming every debit is an expense;
• recording cash receipts as revenue automatically;
• recording loan principal as an expense;
• treating asset purchases as immediate expenses;
• forgetting the inventory cost entry;
• posting unequal compound entries;
• assuming software removes the need to understand double entry.

Key takeaway

Double entry records the complete economic effect of each transaction. Learn the account-type rules, follow the accounting equation and verify that every journal has equal debits and credits.

Official learning references: ACCA accounting equation, ACCA accounting principles and duality, and ACCA computerised accounting systems.

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