Skip to main content

Accounting Basics: Understanding Debits and Credits

Understanding debits and credits is helpful for anyone working with accounting software like QuickBooks Online. In this guide, we'll cover the basics of debits and credits, accounts, and how they work in various QuickBooks transactions.

Introduction to Double Entry Accounting

Double entry accounting, also known as the Venetian accounting system, was invented over 500 years ago. This system is based on the idea that every transaction has two sides: the payer and the payee. Within a company's books, each transaction has both debits and credits, which always balance out.

Accounts: The Building Blocks

An account is a group of related transactions. In a traditional paper-based bookkeeping system, each account would have its own page with the account name at the top, such as Rental Income, Interest Expense, or Bank Account.

There are five main types of accounts types:

Account TypeDescription
AssetWhat you own
LiabilityWhat you owe
EquityMoney invested in the business or value retained from profit
IncomeMoney you made
ExpensesMoney you spent

Let's consider an example of a company that only has one account of each type.

Jon starts a business, opens a bank account, and makes an initial investment of $5,000. Since money in the bank is an asset and the initial investment is equity, the first transaction looks like this:


Now, Jon buys $3,000 worth of gizmos to sell. The transaction for this purchase looks like:


When Jon sells all his gizmos for $5,000, the transaction appears as:

Assets$5,000The money going into the bank account from the sale
Income$5,000The money coming from the sale

After these three transactions, Jon's account balances look like this:

Equity$7,000Net income (Income - Expenses) also counts as equity; this is how profit is accounted for.

Why Debits and Credits Matter

The above example is more abstract than typical QuickBooks usage. Now, let's examine some examples of how debits and credits work within QuickBooks transactions.

Transaction Journal

If you want to see the debits and credits for any transaction click More > Transaction journal

A picture of where to find the transaction journal


When you create an invoice, this is what that looks like on the backend:

Accounts Receivable$200The Accounts Receivable tracks how much is owed to you on invoices. A/R is an asset so a debit increases A/R
Sales$200When you create an invoice that is when your sale is recorded. A credit to a sales account increases that account

Receive payment

When you receive a payment in QuickBooks, the transaction appears as follows:

Bank Account$200Money is received and deposited into the bank account. A debit increases the bank account balance.
Accounts Receivable$200The outstanding amount owed on the invoice is reduced. A credit decreases Accounts Receivable.

By understanding the basics of debits and credits, you'll have a better grasp of how QuickBooks Online records transactions. This knowledge will help you manage your business's finances more effectively.