A Simple Guide to Understanding Account Balances
If you’ve ever looked at a QuickBooks Online report and wondered why some transactions increase an account while others decrease it, understanding debits and credits is the key. Although QuickBooks Online hides much of the complexity of accounting, every transaction you enter is still based on the fundamental principles of double-entry bookkeeping.
This article explains what debits and credits are, how they affect different account types, and how they work behind the scenes in QuickBooks Online.
What Are Debits and Credits?
At its core, accounting follows a simple rule:
Every transaction affects at least two accounts.
For every debit entered, there must be an equal credit entered somewhere else. This keeps the accounting equation in balance:
Assets = Liabilities + Equity
A common misconception is that:
- Debit = Increase
- Credit = Decrease
This is only partially true.
Whether a debit or credit increases or decreases an account depends on the type of account involved.
The Five Main Account Types
QuickBooks Online organizes accounts into five primary categories:
- Assets
- Liabilities
- Equity
- Income
- Expenses
Each category has a “normal balance” that determines whether debits or credits increase the account.
Account TypeNormal BalanceIncreased ByDecreased ByAssetsDebitDebitCreditExpensesDebitDebitCreditLiabilitiesCreditCreditDebitEquityCreditCreditDebitIncomeCreditCreditDebit
A helpful memory tool is:
DEA-LER
- Debits increase:
- Expenses
- Assets
- Credits increase:
- Liabilities
- Equity
- Revenue (Income)
How Debits and Credits Affect Each Account Type
Assets
Assets are things your business owns or controls.
Examples include:
- Checking accounts
- Savings accounts
- Accounts Receivable
- Inventory
- Equipment
- Vehicles
Asset Examples
Transaction Effect: Deposit money into checking: Debit increases asset. Invoice a customer: Debit increases Accounts Receivable. Purchase equipment with cash: Debit equipment, credit cash
Example Entry
You invoice a customer for $1,000.
AccountDebitCreditAccounts Receivable$1,000Income$1,000
Result:
- Accounts Receivable increases
- Income increases
Liabilities
Liabilities represent money your business owes.
Examples include:
- Accounts Payable
- Credit Cards
- Business Loans
- Payroll Liabilities
- Sales Tax Payable
Liability Examples
Transaction Effect: Receive a loan: Credit increases liability. Enter a bill from a vendor: Credit increases Accounts Payable. Pay down a loan: Debit decreases liability
Example Entry
You receive a $10,000 business loan.
Account Debit Credit Checking Account$10,000 Loan Payable$10,000
Result:
- Cash increases
- Loan liability increases
Equity
Equity represents the owner’s stake in the business.
Examples include:
- Owner’s Equity
- Retained Earnings
- Owner Contributions
- Owner Draws
Equity Examples
Transaction Effect: Owner invests money: Credit increases equity. Owner draws money out: Debit decreases equity
Example Entry
Owner contributes $5,000 to the business.
Account Debit Credit Checking Account $5,000 Owner’s Equity$5,000
Result:
- Cash increases
- Equity increases
Income (Revenue)
Income accounts track money earned by the business.
Examples include:
- Service Revenue
- Product Sales
- Interest Income
- Consulting Income
Income Examples
Transaction Effect: Create an invoice: Credit increases income. Record a sale: Credit increases income. Refund revenue: Debit decreases income
Example Entry
You sell services for $500.
Account Debit Credit Checking Account $500 Service Income $500
Result:
- Cash increases
- Revenue increases
Expenses
Expenses represent the costs of running your business.
Examples include:
- Rent
- Utilities
- Payroll
- Advertising
- Office Supplies
Expense Examples
Transaction Effect: Pay rent: Debit increases expense. Purchase office supplies: Debit increases expense. Reverse an expense: Credit decreases expense
Example Entry
You pay a $300 utility bill.
AccountDebitCreditUtilities Expense$300Checking Account$300
Result:
- Expense increases
- Cash decreases