Account Cloud Inc
Fund Accounting Basics

Debits and Credits Explained

A plain-English guide to what debits and credits mean, how they keep your books balanced, and how to read them without an accounting degree.

Updated August 22, 2026

If you’ve ever looked at a financial report and seen the words “debit” and “credit” and felt your eyes glaze over, you’re not alone. These two words scare off more people than almost anything else in accounting. But here’s the good news: the idea behind them is actually simple. You just haven’t seen it explained without ten-dollar words yet.

In plain terms: a debit is an entry on the left side of an account, and a credit is an entry on the right side. That’s it. Neither one means “good” or “bad,” and neither one always means “money coming in” or “money going out.” What they mean depends on what kind of account you’re looking at — and once you learn that one rule, the whole system clicks into place.

Why accounting uses two sides at all

Every single thing that happens with money touches at least two spots in your books. Say your nonprofit gets a $5,000 donation. Two things are true at the same time: your cash went up by $5,000, and your donation revenue went up by $5,000. One event, two effects.

This “two sides to every story” approach is called double-entry bookkeeping, and it’s been used for hundreds of years because it catches mistakes automatically. If the two sides of a transaction don’t match, you know right away that something was typed wrong or left out. It’s like a built-in spell-checker for your money.

Debits and credits are simply the labels for those two sides. Every transaction needs at least one debit and at least one credit, and — this is the golden rule — the total dollar amount of the debits always has to equal the total dollar amount of the credits. If they don’t match, the entry isn’t allowed to go through. Ever.

Forget “increase” and “decrease” — think left and right

The single biggest mistake people make is trying to memorize “debit means increase” or “credit means decrease.” That’s only true for some kinds of accounts, not all of them, and trying to memorize it that way is what makes people give up.

Instead, picture every account as a giant letter T. The left side of the T is the debit side. The right side is the credit side. A debit entry always goes on the left. A credit entry always goes on the right. That part never changes.

What does change is whether “left” or “right” means the account is growing or shrinking, and that depends on which of five buckets the account falls into.

The five types of accounts

Every account your organization uses falls into one of these five buckets:

Type of account Everyday example Grows with a… Shrinks with a…
Asset Cash, bank accounts, equipment Debit (left) Credit (right)
Expense Rent, salaries, supplies Debit (left) Credit (right)
Liability A bill you owe, a loan Credit (right) Debit (left)
Net Assets What’s left over for your mission Credit (right) Debit (left)
Revenue Donations, grants, program fees Credit (right) Debit (left)

(For a for-profit business, that middle “Net Assets” row would be called “Equity” instead. Nonprofits use Net Assets because there are no owners collecting profit — everything left over stays with the mission.)

Notice the pattern: Assets and Expenses grow on the left (debit) side. Liabilities, Net Assets, and Revenue grow on the right (credit) side. If you remember nothing else from this article, remember that one line. It’s the whole system in a sentence.

A real example: a $5,000 donation comes in

Let’s walk through the donation example from earlier and put actual debits and credits on it.

Account Debit Credit
Cash (an asset) $5,000
Contribution Revenue $5,000

Cash is an asset, and assets grow with a debit — so the $5,000 goes on the left. Contribution revenue is revenue, and revenue grows with a credit — so the same $5,000 goes on the right. Add up the debit column: $5,000. Add up the credit column: $5,000. They match, so the entry is allowed to post. This matching pair is called a journal entry, and it’s the basic building block of every set of books.

Another example: paying the rent

Now let’s pay a $500 rent bill out of that same bank account.

Account Debit Credit
Rent Expense $500
Cash (an asset) $500

Rent Expense is an expense, and expenses grow with a debit, so $500 goes on the left. Cash is an asset that’s shrinking this time — and assets shrink with a credit — so $500 goes on the right. Once again, both sides equal $500, and the entry balances.

Notice something interesting: cash was debited in the first example and credited in the second. That’s normal. The same account can be debited on one day and credited the next, depending on whether it’s growing or shrinking that day. There’s nothing wrong with that — it’s exactly how the system is supposed to work.

Wait — doesn’t my bank call it a “debit” when money leaves my account?

This trips up almost everyone, so it’s worth a quick detour. When your bank sends you a statement and says “debit” next to a purchase, it feels like it contradicts everything above, since your cash is clearly going down, not up.

Here’s the trick: your bank isn’t showing you your books. It’s showing you its own books, from its point of view. To your bank, the money in your account isn’t their asset — it’s actually a debt they owe you (a liability on their books). And remember, liabilities shrink with a debit. So when your bank says “debit,” they mean their liability to you just went down, which happens to match the moment your cash goes down too. Same event, two different companies’ books, two different reasons for the word “debit.” You don’t need to worry about your bank’s side of it — just keep track of your own.

Do you need to memorize any of this to use Account Cloud Unity?

No — and that’s the point of a good fund accounting system. Account Cloud Unity builds the correct debit and credit entries for you automatically behind the scenes every time a donation, bill, or bank transaction is recorded. You’ll never have to sit down and decide which side of a T-account something belongs on.

So why learn this at all? Because understanding debits and credits makes every financial report your organization produces easier to read. When your board sees a Statement of Activities or your auditor asks about a journal entry, you’ll understand exactly what happened instead of nodding along. It also makes it much easier to catch something that looks off — if an account is moving in a direction that doesn’t make sense for its type, that’s often the first clue something needs a second look.

Quick recap

  • A debit is the left side of an account. A credit is the right side. Neither is “good” or “bad.”
  • Every transaction needs matching debits and credits — the two sides always have to add up to the same total.
  • Assets and Expenses grow with debits. Liabilities, Net Assets, and Revenue grow with credits.
  • Account Cloud Unity handles the actual debit-and-credit mechanics for you — this is background knowledge that helps you read your numbers with confidence, not a skill you need to do the bookkeeping yourself.

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