Debits and Credits Made Simple: What DEALER Can Teach You
Part of the Bookkeeping Made Simple series by Legacy Mode Bookkeeping
When you hear the words debit and credit, what comes to mind?
For many people, a debit means money leaving a bank account, and a credit means money coming in. That's how we often see these terms used in everyday banking.
But in bookkeeping, debits and credits work a little differently.
They are the foundation of how financial transactions are recorded, and understanding them can help you make better sense of your business finances.
The good news? You don't have to memorize a complicated accounting textbook to understand the basics.
There's a simple memory trick called DEALER that can help.
First, What Are Debits and Credits?
Every business transaction affects at least two accounts. This is called double-entry bookkeeping.
A debit is an entry on the left side of an account, while a credit is an entry on the right side.
Here's the most important rule:
Total debits must always equal total credits for every journal entry.
That doesn't mean every account increases or decreases the same way.
Some accounts increase with debits, while others increase with credits.
Understanding which is which is where DEALER comes in.
Meet DEALER: The Accounting Memory Trick
DEALER is a mnemonic, or memory tool, that helps you remember which types of accounts increase with debits and which increase with credits.
Here's what each letter stands for:
| Letter | Account Type | Increases With |
|---|---|---|
| D | Draws / Dividends | Debit |
| E | Expenses | Debit |
| A | Assets | Debit |
| L | Liabilities | Credit |
| E | Equity | Credit |
| R | Revenue | Credit |
DEALER: Draws, Expenses, Assets increase with Debits. Liabilities, Equity, Revenue increase with Credits.
Let's break them down using everyday business examples.
D = Draws or Dividends
When a business owner takes money out of the business for personal use, that withdrawal may be recorded as an owner's draw, depending on the business structure.
For example, a sole proprietor transfers $500 from the business checking account to a personal account.
The owner's draw account increases with a debit, while business cash decreases with a credit.
Dividends and distributions have their own accounting rules depending on the type of business. Not every business uses an owner's draw account.
E = Expenses
Expenses are costs associated with operating your business.
Think rent, advertising, utilities, insurance, or office supplies used in daily operations.
When you record an expense, the expense account generally increases with a debit.
For example, your business pays a $200 monthly internet bill.
The internet expense increases by $200 with a debit, and cash decreases by $200 with a credit.
A = Assets
Assets are resources your business owns or controls that provide economic value.
Examples include cash, equipment, vehicles, inventory, and money customers owe your business.
When an asset increases, you record a debit.
For example, a business receives $1,000 in cash from its owner as an investment.
The cash account increases by $1,000 with a debit, and the owner's capital account increases by $1,000 with a credit.
L = Liabilities
Liabilities are amounts your business owes to others.
Examples include business loans, credit card balances, unpaid vendor bills, and certain taxes owed.
Liabilities generally increase with credits.
For example, your business purchases $800 of supplies on credit from a vendor.
If those supplies qualify as an asset, the supplies account increases by $800 with a debit, and accounts payable increases by $800 with a credit.
You now have supplies available for the business, along with an obligation to pay the vendor.
E = Equity
Equity represents the owner's remaining interest in the business after subtracting liabilities from assets.
One way to understand equity is through the basic accounting equation:
Assets = Liabilities + Equity
For example, if your business has $50,000 in assets and $20,000 in liabilities, the remaining equity is $30,000.
Equity accounts generally increase with credits, although some equity-related accounts, such as owner's draws, normally carry debit balances.
R = Revenue
Revenue is money your business earns from providing products or services.
Examples include sales revenue, service income, rental income, and consulting fees.
Revenue generally increases with credits.
For example, your business completes a $1,500 service and receives payment immediately.
Cash increases by $1,500 with a debit, and service revenue increases by $1,500 with a credit.
Both sides of the transaction are recorded.
What Is a Normal Balance?
You may hear a bookkeeper or accountant refer to an account's normal balance.
A normal balance simply means the side of an account where increases are usually recorded.
Using DEALER:
Draws, expenses, and assets normally have debit balances.
Liabilities, equity, and revenue normally have credit balances.
But here's something important: A debit doesn't always increase an account, and a credit doesn't always decrease one.
It depends on the type of account.
For example, a debit increases an asset account but decreases a liability account.
A credit increases a revenue account but decreases an asset account.
That's why understanding account types is more helpful than simply memorizing debit and credit as money in or money out.
Let's Put DEALER Into Practice
Imagine you own a small lawn care business.
You purchase a commercial lawn mower for $2,000 using money from your business checking account.
At first, you might think, "My business just spent $2,000, so that's a $2,000 expense."
But not necessarily.
A commercial lawn mower that will be used over multiple years generally qualifies as equipment, which is an asset.
Here's how the purchase would be recorded:
| Account | Debit | Credit |
|---|---|---|
| Equipment | $2,000 | — |
| Business Checking | — | $2,000 |
| Total | $2,000 | $2,000 |
Total Debits = Total Credits
Let's look at what happened.
Equipment increased.
Equipment is an asset, and assets increase with debits. So we debit equipment for $2,000.
Cash decreased.
Cash is also an asset, but assets decrease with credits. So we credit the business checking account for $2,000.
The transaction balances.
The debit and credit are both $2,000.
The business exchanged one asset, cash, for another asset, equipment.
Assuming the mower is capitalized under the business's accounting policy, the full $2,000 would not immediately appear as an operating expense on the Profit & Loss statement. Instead, the equipment would generally be recorded on the Balance Sheet and depreciated over its useful life.
Tax treatment may differ, and certain purchases may qualify for immediate deductions depending on applicable rules.
Why Does This Matter to a Business Owner?
Because spending money doesn't always mean your business has incurred an expense that immediately reduces accounting profit.
Understanding how purchases are recorded helps you read your financial statements more accurately.
And that brings us to an important distinction:
Cash leaving your bank account and expenses appearing on your Profit & Loss statement are not always the same thing.
Three Common Debit and Credit Mistakes
Mistake #1: Assuming Debit Means Money Out
In everyday banking, a debit often represents a withdrawal.
In bookkeeping, a debit can increase cash, equipment, inventory, or expenses.
The meaning depends on the account being affected.
Mistake #2: Treating Every Purchase as an Expense
Some purchases are expenses, while others may be assets.
For example, paying your monthly electric bill is generally an expense.
Buying equipment expected to benefit your business for several years may be recorded as an asset.
The distinction matters because it affects your financial reports.
Mistake #3: Thinking Balanced Books Mean Accurate Books
This one is especially important.
A journal entry can have equal debits and credits and still be incorrect.
For example, if you purchase equipment but accidentally record it as an advertising expense, your entry could still balance.
However, your financial statements may be inaccurate.
Balanced entries are necessary, but accurate account classifications matter just as much.
How Does This Apply to QuickBooks?
If you use QuickBooks Online, you may not see debits and credits every time you record a transaction.
That's because the software handles much of the double-entry accounting behind the scenes.
When you create an invoice, record a payment, enter a bill, or categorize a transaction, QuickBooks uses accounting rules to update the appropriate accounts.
But the software still relies on the information entered.
For example, categorizing an equipment purchase as an ordinary expense can affect how the transaction appears in your financial reports.
Understanding debits, credits, and account types helps you recognize when something doesn't look right.
You don't need to become an accountant to benefit from that knowledge.
You simply need to understand enough to ask better questions about your numbers.
The Financial Clarity Takeaway
DEALER is more than a memory trick.
It helps explain how transactions move through your books and why your financial statements tell different parts of your business's financial story.
When you understand the basics of debits and credits, you're better equipped to understand:
What your business owns.
What your business owes.
How revenue and expenses affect your results.
Why cash flow and profitability are not the same thing.
Why accurate transaction categorization matters.
And while bookkeeping software can automate many of the calculations, it can't replace the value of understanding what your numbers mean.
Financial clarity starts with knowing what your books are telling you.
Ready to Build More Financial Clarity?
At Legacy Mode Bookkeeping, we believe understanding your finances shouldn't feel complicated.
We help small businesses, real estate professionals, and nonprofits maintain organized financial records so they can make informed decisions with greater confidence.
Whether you're getting started with QuickBooks, catching up on bookkeeping, or looking for ongoing support, we're here to help you build a stronger financial foundation.
Build Clarity. Build Confidence. Build Legacy.
Explore our bookkeeping services or schedule a Financial Clarity conversation to learn how we can support your business.
Bookkeeping Made Simple is an educational series from Legacy Mode Bookkeeping designed to make accounting concepts easier to understand and apply in everyday business decisions.