If you’ve overheard a bookkeeper or half listened to an accountant, chances are you’ve run across the terms “debit” and “credit.” What are they, and what do they mean for your books?

A full discussion of history and etymology is outside the scope of this blog so I shall be brief. Debits and credits track money in and out of accounts. When a debit is entered, a credit is entered as well — a sort of cause and effect relationship. For example, when a company sells an item for cash, the bank account balance goes up — and so does revenue.

A debit isn’t “good” and a credit isn’t “bad,” they’re simply ways to track what is happening in the company and where the money is going. Some accounts (typically assets and expenses) are increased by debits, and some accounts (typically liabilities, equities, and revenues) are increased by credits.

Returning to our example of a business selling an item for cash, the bank account is debited and the revenue account is credited. As another example, when a company pays an invoice, the bank account balance is credited, resulting in a reduction in its balance, and the accounts payable liability account is debited, also resulting in a reduction in its balance.

Don’t worry if debits and credits don’t make sense right away. Keep an open mind and review several transactions, and it’ll start to make sense.