Debit and credit in accounting are the two sides of every journal entry: a debit is recorded on the left side of an account and a credit on the right. Depending on the type of account, a debit increases some accounts and decreases others, and the same is true of a credit.
You do not need to memorise long tables to find both sides. Ask two questions: which accounts did this transaction affect, and did each one go up or down? With one simple rule, explained below, you can work out both sides of any double entry in your business.
This article explains the difference between debit and credit and the double-entry principle, applies them to four transactions from a Saudi store with 15% VAT, shows why a bank statement looks reversed, and explains how accounting software posts both sides automatically.
What Do Debit and Credit Mean in Accounting?
Debit and credit are not labels for good or bad; they are two directions of recording in an account. Every account has a debit side and a credit side, and its balance is the difference between them.
In Arabic, debit is madin (مدين) and credit is da’in (دائن), and the everyday meaning helps: a customer who buys on credit has a debit balance because he owes the business money. But the terms go wider than that. Cash, inventory and expenses are all accounts with a normal debit balance.
The difference between debit and credit comes down to the nature of the account:
- Normal debit balance: assets (cash, bank, inventory, receivables) and expenses. They increase with a debit and decrease with a credit.
- Normal credit balance: liabilities (suppliers, loans, output VAT payable), equity and revenue. They increase with a credit and decrease with a debit.
The Double-Entry Principle: Every Transaction Has Two Sides
Double-entry accounting means every transaction affects at least two accounts, and total debits always equal total credits. This equality is what keeps the accounting equation in balance: assets = liabilities + equity.
When you buy stock for cash, inventory goes up and cash goes down by the same amount. When you sell on credit, receivables go up and sales go up. No transaction touches only one account, which is why the system is called double entry.
The practical benefit is error detection: if the trial balance does not balance, an entry is missing or has the wrong amount. For the wider framework behind this idea, see our guide to accounting principles for non-accountants.
A Simple Rule to Find the Debit and Credit Sides
The easiest rule is this: whatever comes into the business or increases its assets and expenses is a debit; whatever goes out or increases its liabilities, equity and revenue is a credit. Then check that the two totals are equal.
Apply the rule in three steps to any transaction:
- Identify the accounts affected, such as cash, sales and VAT.
- Identify the type of each account: asset or expense, or liability, equity or revenue.
- Decide whether each account went up or down, then use the table below.
| Account Type | Increases with | Decreases with | Examples |
|---|---|---|---|
| Assets | Debit | Credit | Cash, bank, inventory, receivables |
| Expenses | Debit | Credit | Rent, salaries, cost of goods sold |
| Liabilities | Credit | Debit | Suppliers, loans, output VAT |
| Equity | Credit | Debit | Capital, retained earnings |
| Revenue | Credit | Debit | Sales, service income |
So which side is the debit? It is the account that received the value or benefited from the transaction. The credit side is the account that gave the value or took on the obligation.
Journal Entry Examples from a Saudi Store
Let us apply these debit and credit rules to a VAT-registered homeware store in Dammam. All amounts are in SAR and VAT is 15%.
Cash Sale with VAT
The store sells goods for SAR 2,000 before VAT and collects SAR 2,300 in cash. Cash came in (an asset increased, so debit), sales revenue was earned (credit), and the store now owes VAT to the authority (a liability increased, so credit).
| Account | Debit | Credit |
|---|---|---|
| Cash on hand | 2,300 | |
| Sales | 2,000 | |
| Output VAT | 300 | |
| Total | 2,300 | 2,300 |
If the goods cost SAR 1,200, a second entry is posted: debit cost of goods sold 1,200, credit inventory 1,200.
Credit Sale to a Customer
The store sells to a restaurant on credit for SAR 8,000 before VAT, an invoice of SAR 9,200. The customer account replaces cash because nothing has been collected yet.
| Account | Debit | Credit |
|---|---|---|
| Receivables – restaurant | 9,200 | |
| Sales | 8,000 | |
| Output VAT | 1,200 |
When the restaurant pays by bank transfer: debit bank 9,200, credit receivables 9,200. Note that revenue was recorded at the time of sale, not at collection, which is the accrual basis in action.
Buying Stock from a Supplier
The store buys stock on credit for SAR 20,000 before VAT, an invoice of SAR 23,000. Inventory increased (debit), recoverable input VAT increased (an asset, debit), and the amount owed to the supplier increased (credit).
| Account | Debit | Credit |
|---|---|---|
| Inventory | 20,000 | |
| Input VAT | 3,000 | |
| Suppliers | 23,000 |
Paying Rent
The store pays its monthly showroom rent of SAR 5,000 from the bank. Rent is an expense that increased (debit) and the bank is an asset that decreased (credit): debit rent expense 5,000, credit bank 5,000.
If the landlord issues a tax invoice for the rent, add an input VAT line on the debit side and increase the bank credit by the same amount. The VAT treatment of rent depends on the type of property, so check with your accountant or the Zakat, Tax and Customs Authority before you finalise the entry.
Also read: full control of journal entries with an integrated ERP, to see how these entries are reviewed and posted inside the system.
Simple vs Compound Entries
A simple entry has one debit account and one credit account, while a compound entry has more than one account on either side or both. For VAT-registered businesses, most sales and purchase entries are compound.
The rent payment without VAT is a simple entry. The cash sale is compound, because the credit side has two accounts: sales and output VAT. The rule is the same in both cases: total debits equal total credits.
| Entry Type | Number of Accounts | Store Example |
|---|---|---|
| Simple entry | One debit, one credit | Paying SAR 5,000 rent from the bank |
| Compound entry | Three or more | Cash sale of SAR 2,300 including VAT |
If you are reviewing your entries and want to make sure accounts are classified correctly against your chart of accounts, talk to the Daysum team about getting the settings right.
Debit and Credit on a Bank Statement: Why It Looks Reversed
A bank statement looks reversed because the bank prepares it from its own point of view, not yours. The money you deposit is a liability of the bank to you, so it appears as a credit on the statement.
In your own books it is the opposite: a deposit increases your bank asset, so it is a debit. A withdrawal or outgoing transfer is a debit on the bank statement but a credit in your books, because your asset has decreased.
| Transaction | On the Bank Statement | In Your Books |
|---|---|---|
| Customer payment deposited | Credit | Debit bank |
| Transfer to a supplier | Debit | Credit bank |
| Bank charges | Debit | Credit bank, debit bank charges expense |
This reversal is the basis of bank reconciliation, covered in detail in online bank reconciliation in cloud accounting software.
How Daysum Posts Both Sides from the Invoice
In Daysum’s cloud ERP built on Odoo, users do not type journal entries by hand for most daily transactions. When a sales invoice is confirmed, the system creates the full compound entry: the customer or cash account is debited, and sales and output VAT are credited, based on the accounts linked to the product and tax in the chart of accounts.
The same applies across the accounting cycle:
- Supplier bills: debit inventory or the expense and input VAT, credit the supplier.
- Deliveries: debit cost of goods sold and credit inventory when automated inventory valuation is used.
- Payments and receipts: clear the customer or supplier balance against bank or cash.
- E-invoicing: the same invoice that creates the entry is issued in line with Fatoora Phase 2 requirements.
The owner reviews entries instead of writing them, and the trial balance stays balanced because the system does not accept an unbalanced entry in the first place. To see how the accounts behind these entries are organised, read about the chart of accounts and ledgers in Odoo.
Conclusion: Debit and Credit in a Business Owner’s Language
Debit and credit are directions of recording, not verdicts on a transaction. Assets and expenses increase with a debit; liabilities, equity and revenue increase with a credit; and every transaction has two sides with equal totals.
Remember that rule and you will understand any entry in your books, including why a deposit is a credit on the bank statement and a debit in your ledger. The daily recording itself can be handled by the accounting system straight from the invoice.
If you want a system that posts both sides automatically and connects your invoices to Fatoora, contact the Daysum team and we will walk you through the workflow using your own transactions.
FAQs About Debit and Credit
Double entry is the bookkeeping method that records every transaction in at least two accounts, one debited and one credited, with equal totals. It keeps the accounting equation in balance after every transaction. It is the basis of the trial balance and of the financial statements.
The debit side is the account that received value or whose assets or expenses increased, such as cash in a cash sale or inventory in a purchase. It is recorded on the left side of the account. The credit side is the account that gave the value or whose liability, equity or revenue increased.
By form, entries are either simple, with two accounts, or compound, with three or more. By purpose and timing, there are opening entries at the start of the business or year, daily entries for ongoing transactions, adjusting entries at period-end, and closing entries that transfer revenue and expense balances to the result for the period.
The bank prepares the statement from its own point of view, and the money you deposit is a liability the bank owes you. It is therefore a credit in the bank's books, while in your books it is a debit to the bank account because your assets increased. This reversal is normal and must be kept in mind during bank reconciliation.
Yes. This happens when a customer pays more than the invoiced amount or pays in advance before an invoice is issued. The credit balance is an obligation of the business to deliver goods or refund the money, and it is usually cleared against the next invoice or by a refund.
