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    Learn Business · Accounting Foundations

    Debits, Credits, and Journal Entries: Learn the Logic

    Understand which side of an account changes, then build journal entries you can explain. Use a normal-balance reference, worked examples, and practice scenarios to connect each entry to the business event.

    By Taylor Frizzell, MBA · October 6, 2026 · Original examples

    Use the debit & credit referenceExplore worked entries

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    What do debit and credit mean?

    A debit records an amount on the left side of an account. A credit records it on the right. Neither word automatically means an increase, a decrease, a gain, or a loss. The account type determines the effect. For example, a debit increases Cash but decreases Accounts Payable. A credit decreases Cash but increases Service Revenue. Learn the account first, then choose the side.
    Every journal entry must balance: Total debits = total credits. The entry may use two accounts or several accounts, but its combined dollar amounts must agree.
    Quick reference

    Debits, credits, and normal balances

    A normal balance is the side on which an account ordinarily carries its balance. It provides a useful review signal, but an unusual balance is a reason to investigate rather than automatic proof of an error.
    Account types and their usual debit/credit effects
    Account type Increase Decrease Normal balance Examples
    Assets Debit Credit Debit Cash, receivables, inventory, prepayments, equipment
    Liabilities Credit Debit Credit Payables, loans payable, accrued wages, unearned revenue
    Contributed equity Credit Debit Credit Common stock, owner capital
    Revenue Credit Debit Credit Service revenue, sales revenue
    Expenses Debit Credit Debit Rent, wages, utilities, insurance expense
    Distributions Debit Credit Debit Dividends or owner drawings; not operating expenses
    Contra-assets Credit Debit Credit Accumulated depreciation, allowance for credit losses
    Contra-revenue Debit Credit Debit Sales returns and allowances

    Why the rules fit the accounting equation

    Assets = Liabilities + Equity
    Revenue increases earnings and therefore equity; expenses reduce earnings and therefore equity. Distributions also reduce equity, but they do not measure the cost of generating revenue. This explains why expense and distribution accounts normally increase with debits while revenue increases with credits. For a simple corporation, the expanded relationship is: Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue − Expenses − Dividends. Other equity changes can arise in more complex situations. A memory aid is DEALER: Dividends, Expenses, and Assets generally increase with Debits; Liabilities, Equity, and Revenue generally increase with Credits. Use it after classifying the account, and remember contra accounts run in the opposite direction.

    Why your bank says “credit” when cash increases

    The bank maintains its own books. Your deposit is cash on your books, but the amount the bank owes you is a liability on its books. The same event is recorded from two different perspectives. A debit-card purchase does not establish a universal debit rule for your ledger.

    How to prepare a journal entry

    1. Describe the event. Identify the source document, date, amount, and what actually occurred.
    2. Choose the accounts. Separate cash movement from revenue, expense, asset, liability, and equity recognition.
    3. Classify each account. Is it an asset, liability, equity, revenue, expense, distribution, or contra account?
    4. Decide whether each balance increases or decreases. Write this in plain language before selecting debit or credit.
    5. Apply the debit/credit rules. Enter the amounts and verify equal totals.
    6. Document and review. Include a useful explanation and supporting reference; confirm the classification, period, and any required approval.
    A useful entry includes a date, account titles, debit and credit amounts, an explanation, and a source reference. Software may also require customer, vendor, department, class, or project information.
    Ask the economic question first. “Did cash leave?” does not tell you whether the entry belongs in an expense, a prepaid asset, a fixed asset, a liability payment, or a distribution.

    Eight journal entry examples

    The following are independent accrual-accounting examples for a fictional service business. They do not form a cumulative trial balance. Taxes and other complications are excluded.

    1. Earn revenue and receive cash

    The business completes a $900 service and receives payment immediately. Cash increases, and earned service revenue increases.
    Service completed and paid — $900
    Account Debit Credit
    Cash 900 —
    Service revenue — 900
    Effect: Assets increase $900; equity increases $900 through revenue.

    2. Bill a customer, then collect payment

    A $1,200 service is completed on account. Revenue is earned before the customer pays.
    Recognize completed service — $1,200
    Account Debit Credit
    Accounts receivable 1,200 —
    Service revenue — 1,200
    When the customer later pays in full, debit Cash $1,200 and credit Accounts Receivable $1,200. Cash increases while the receivable decreases. The collection does not create another $1,200 of revenue.

    3. Buy supplies on credit, then pay the vendor

    The business receives $500 of unused supplies and will pay later. Assume the supplies are tracked as an asset until used.
    Supplies received on credit — $500
    Account Debit Credit
    Supplies 500 —
    Accounts payable — 500
    Paying the invoice later debits Accounts Payable $500 and credits Cash $500. The payment reduces the liability; it does not purchase the supplies a second time. Supplies used become an expense through a separate supported entry.

    4. Pay for benefits that extend into future periods

    The business pays $2,400 for a 12-month insurance policy. Initially, the payment creates a prepaid asset.
    Annual insurance paid — $2,400
    Account Debit Credit
    Prepaid insurance 2,400 —
    Cash — 2,400
    For one full month of coverage, debit Insurance Expense $200 and credit Prepaid Insurance $200. The remaining asset is $2,200. The timing follows the period receiving the benefit.

    5. Receive a customer deposit before earning it

    A customer pays $1,800 before services are delivered. The business records the obligation to provide those services.
    Customer advance received — $1,800
    Account Debit Credit
    Cash 1,800 —
    Unearned revenue — 1,800
    After $600 is earned, debit Unearned Revenue $600 and credit Service Revenue $600. Cash does not change again, and the remaining obligation is $1,200. Actual revenue recognition depends on the agreement and applicable standards.

    6. Recognize wages earned but not yet paid

    Employees earned $750 by period-end, but payment will occur next period.
    Period-end wages accrual — $750
    Account Debit Credit
    Wages expense 750 —
    Wages payable — 750
    With no reversing entry and no additional wages included, the later settlement debits Wages Payable $750 and credits Cash $750. Expensing the same amount again would double-count the cost.

    7. Receive loan proceeds

    A lender advances $10,000. The business receives cash and takes on a repayment obligation.
    Loan proceeds received — $10,000
    Account Debit Credit
    Cash 10,000 —
    Loan payable — 10,000
    Loan proceeds are not sales revenue. Repayment also needs to distinguish principal from interest.

    8. Record depreciation

    A supported depreciation schedule assigns $150 of equipment cost to the period.
    Period depreciation — $150
    Account Debit Credit
    Depreciation expense 150 —
    Accumulated depreciation — 150
    Accumulated Depreciation is a contra-asset with a normal credit balance. It reduces the asset’s reported carrying amount. Recording depreciation does not create a new cash payment.

    Compound entries: More than two accounts

    A compound entry contains multiple debits, multiple credits, or both. Suppose a $1,100 loan payment includes $1,000 of principal and $100 of current-period interest that has not previously been accrued.
    Loan payment split between principal and interest
    Account Debit Credit
    Loan payable 1,000 —
    Interest expense 100 —
    Cash — 1,100
    Total 1,100 1,100
    The liability falls $1,000, the expense reduces profit $100, and cash falls $1,100. Charging the entire payment to expense would overstate expense and leave the principal balance too high. If interest was already accrued, its settlement would reduce Interest Payable instead.

    From a journal entry to a ledger balance

    The journal organizes events by date. The general ledger organizes activity by account. A T-account is a teaching view of an account with debits on the left and credits on the right.
    Cash T-account example — beginning balance is zero
    Debit side: Increases Credit side: Decreases
    Owner investment: 3,000 Rent paid: 700
    Service cash receipt: 900 Utilities paid: 200
    Total debits: 3,900 Total credits: 900
    Ending Cash = $3,900 − $900 = $3,000 debit balance. The other sides of those entries appear in capital, revenue, rent expense, and utilities expense. Cash’s debits and credits do not have to equal each other; each complete journal entry must balance across all affected accounts. See the Accounting Cycle guide for the next stages: trial balances, period-end adjustments, financial statements, and closing entries.

    Common journal entry mistakes

    Starting with the cash movement

    A cash payment may settle a payable, acquire an asset, prepay a cost, or distribute equity. Classify the event before calling it an expense.

    Recording collections as new sales

    When earned revenue was already recorded, collection generally changes Cash and Accounts Receivable. Recognizing revenue again duplicates the sale.

    Using balance as the only check

    Equal debits and credits can still conceal an omitted transaction, duplicate entry, wrong account, wrong amount, or wrong period.

    Correct the problem with an audit trail

    Suppose a $300 current-period utility bill was mistakenly debited to Rent Expense and credited to Accounts Payable. A supported reclassification debits Utilities Expense $300 and credits Rent Expense $300. Accounts Payable and total expense do not change; the expense category is corrected. This example assumes the period remains open and the original liability was valid. Changes affecting issued financial statements or prior periods may require additional analysis. Preserve the original record and the reason for the correction.

    Avoid duplicate manual entries in accounting software

    An invoice, bill, payment, or payroll workflow may already generate ledger entries. Check the existing transaction before adding a manual journal entry. Where customer or vendor detail matters, use the supported workflow so the subledger and general ledger remain aligned.

    Practice the reasoning

    Name the accounts, classify them, identify the increases and decreases, and write the entry before revealing each explanation.
    A $450 utility bill arrives for services used this month, payable next month. What is the entry?Debit Utilities Expense $450 and credit Accounts Payable $450. The expense belongs to this month; the unpaid bill creates a liability.
    A customer pays $800 against an existing receivable. What changes?Debit Cash $800 and credit Accounts Receivable $800. One asset increases and another decreases. There is no new revenue from collection.
    You buy $2,500 of equipment, paying $500 cash and financing $2,000. How does it balance?Debit Equipment $2,500, credit Cash $500, and credit Loan Payable $2,000. Total debits and credits both equal $2,500. Assume the acquisition meets capitalization criteria and no additional costs apply.
    A $1,000 customer advance is fully earned this period. Is Cash debited again?No. Debit Unearned Revenue $1,000 and credit Service Revenue $1,000. The cash receipt was recorded earlier; this entry records fulfillment of the obligation.
    Does a credit balance in Accounts Receivable always prove an error?No. It may reflect an overpayment or a customer credit, but it should be investigated. Confirm the source and determine whether presentation or reclassification is needed.
    Continue the learning path

    Put journal entries into the full accounting process.

    Next, learn how to place revenue and expenses in the correct period with the Adjusting Entries guide.

    Follow one business from source documents through the statements and closing entries. Then use the Accounting hub to explore reporting, cost behavior, and practical tools. Continue to the Accounting CycleExplore Accounting

    Further study and learning notes

    The examples, calculations, and explanations are original. The following open-textbook sections provide additional study of transaction analysis and journal posting.

    Educational material for general learning. Actual entries depend on the facts, contracts, accounting framework, and business policies.