The Profit Ledger

Welcome to The Profit Ledger — your go-to spot for smart bookkeeping tips, tutorials, and tools for small business success. Whether you’re doing the books yourself or reviewing reports from your bookkeeper, we help you take control of your finances with clarity and confidence.

Let’s talk about a topic that tends to make even the most seasoned business owners sweat: debits and credits.

But here’s the secret: they’re not scary — they’re just a system. A beautifully logical one, once you get the hang of it. So grab your coffee (or calculator), and let’s walk through the basics.

---

🧠 What Are Debits and Credits?

At their core, debits and credits are the backbone of double-entry bookkeeping. Every transaction affects at least two accounts, and debits and credits ensure the books stay balanced.

💡 Think of it like this: for every give, there’s a take. One account increases, and another decreases.

---

🔄 The Golden Rule of Accounting

Debits = Credits
Always. Forever. Every single transaction.

That’s how your books stay in balance and how the accounting equation works:

Assets = Liabilities + Owner’s Equity

---

🧾 Debit and Credit Cheat Sheet (By Account Type)

Here’s a simple chart to show how debits and credits affect different types of accounts:

Account Type	Debits ⬅️	Credits ➡️
Assets	Increase	Decrease
Liabilities	Decrease	Increase
Equity	Decrease	Increase
Revenue (Income)	Decrease (rarely used)	Increase
Expenses	Increase	Decrease

---

🔧 Let’s See It in Action: Common Examples

💸 You Buy Office Supplies for $100 (on your business debit card)

• Debit: Office Supplies (Expense) $100 → expense increases
• Credit: Bank Account (Asset) $100 → cash decreases

---

💰 You Receive $500 from a Client

• Debit: Bank Account (Asset) $500 → cash increases
• Credit: Sales Revenue (Income) $500 → revenue increases

---

🧾 You Pay a Vendor Invoice (Accounts Payable) for $1,000

• Debit: Accounts Payable (Liability) $1,000 → you reduce what you owe
• Credit: Bank Account (Asset) $1,000 → cash decreases

---

🪙 You Pay Yourself (Owner’s Draw)

• Debit: Owner’s Equity $2,000 → equity decreases
• Credit: Bank Account (Asset) $2,000 → cash decreases

---

🤔 So, When Do You Debit vs. Credit?

Ask yourself two questions:

1. What accounts are being affected?
2. Are they increasing or decreasing?

Then use the cheat sheet above to figure out whether to debit or credit each one.

And remember — every transaction has at least one debit and one credit, and they must balance.

---

📚 Why It Matters for Small Business Owners

Even if you’re not doing your books yourself, understanding debits and credits helps you:

• Review reports with confidence
• Catch and question bookkeeping errors
• Understand how your money flows
• Communicate better with your accountant or bookkeeper

---

✅ Final Thoughts

Debits and credits aren’t just for accountants — they’re for smart business owners like you who want to understand the financial pulse of their business.

At The Profit Ledger, we break it all down so you can build up your confidence, one smart entry at a time.

You run the business. Let’s make sure the books keep up. Have a question on how to treat a transaction? Let us know in the comments!