Debit and credit explained: how double-entry bookkeeping works
Every transaction touches two accounts, and the two sides are always equal. One rule, six everyday entries and a GST example — enough to read any ledger.
Double entry rests on one observation: nothing happens to a business on one side only. If cloth comes in, either money went out or a debt was created. If money comes in, either something was sold, or a customer's debt was cleared, or somebody lent it. Every transaction is therefore written twice — once as a debit, once as a credit — for the same amount.
The one rule worth remembering
| Kind of account | Increases on | Decreases on |
|---|---|---|
| Assets (stock, bank, debtors, machinery) | Debit | Credit |
| Expenses (purchases, rent, salary) | Debit | Credit |
| Liabilities (creditors, loans) | Credit | Debit |
| Capital | Credit | Debit |
| Income (sales, interest received) | Credit | Debit |
Debit does not mean "bad" and credit does not mean "good". They are simply left and right. What you have and what you spent go on the left; what you owe and what you earned go on the right.
Six everyday entries
| What happened | Debit | Credit |
|---|---|---|
| Bought cloth on credit, ₹1,00,000 | Purchases 1,00,000 | Supplier 1,00,000 |
| Paid that supplier by bank | Supplier 1,00,000 | Bank 1,00,000 |
| Sold cloth on credit, ₹1,40,000 | Customer 1,40,000 | Sales 1,40,000 |
| Customer paid by bank | Bank 1,40,000 | Customer 1,40,000 |
| Paid shop rent in cash, ₹15,000 | Rent 15,000 | Cash 15,000 |
| Owner brought in capital, ₹5,00,000 | Bank 5,00,000 | Capital 5,00,000 |
The same purchase, with GST
Tax paid on a purchase is not a cost if you can claim it back, so it gets an account of its own. Cloth of ₹1,00,000 bought within the state at 5% GST:
| Account | Debit | Credit |
|---|---|---|
| Purchases | 1,00,000 | |
| Input CGST | 2,500 | |
| Input SGST | 2,500 | |
| Supplier | 1,05,000 |
Three debits, one credit, and the two sides still agree. That is all a "compound" entry is.
Why the bank says the opposite
Your bank statement shows a deposit as a credit, while your own books debit the bank. Both are right. The statement is the BANK's book: to the bank, your balance is money it owes you — a liability — so it increases on credit. In your book the same balance is an asset, and it increases on debit.
What double entry gives you
- A built-in check: total debits must equal total credits. If they do not, an entry is incomplete.
- Both stories at once — what you earned (profit and loss) and what you have (balance sheet) — from the same entries.
- A trail: every figure in a statement can be traced back to the vouchers that made it.
Good accounting software will not let you save a voucher whose two sides differ. That one refusal removes a whole class of mistakes — but not the mistake of choosing the wrong account, which still balances perfectly.