What is a debit?
Definition of a debit
A debit is an entry in your accounts that increases what you own or reduces your profit. It's the opposite of a credit entry.
How debits work in your accounts
There are five different kinds of nominal accounts in a business, and a debit affects each account differently.
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- a debit increases an asset that your business owns, like its cash
- a debit increases a day-to-day running cost or expense of your business, like stationery
- a debit reduces a liability that your business owes, such as a tax bill
- a debit reduces income that your business is earning; a sales credit note would go into your sales account as a debit
- a debit reduces capital (or money) that the business owes back to its owner
Every time you make a debit entry in a set of accounts, you must also make an equal and opposite credit at the same time.
How debits and credits work for different accounts
To increase the amount in your business accounts, you need to debit some accounts and credit others. What you do depends on the kind of account you’re dealing with:
- for an income account, you credit to increase it and debit to decrease it
- for an expense account, you debit to increase it, and credit to decrease it
- for an asset account, you debit to increase it and credit to decrease it
- for a liability account you credit to increase it and debit to decrease it
- for a capital account, you credit to increase it and debit to decrease it
Example of a debit:
If you get a bill for your accountants' fees, that's a day-to-day running cost, so you would debit your expenses account in your business with the amount of the bill. Remember, for each debit there should be an equal and opposite credit. This is money that you owe to your accountant, so the credit entry would go to trade creditors.
Frequently Asked Questions
Why doesn’t a debit always decrease the amount of money? That’s how it works in my bank account!
On a bank statement, money paid in is labelled “Credit”, and money taken out as “Debit” because the bank are looking at this from their own point of view. For them, when you pay some money into the bank, that’s money that they will have to pay back to you sometime. So that’s increasing what they owe to you, which for them is an increase in a liability - and an increase in a liability is a credit.
And when you take money out of your bank account, that reduces the amount that they’ll have to pay back to you. That’s a decrease in a liability, which means that it's a debit.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.