How to Think About Debit and Credit — A Clean, Timeless Approach
- Admin
- May 14
- 3 min read
Getting to the Heart of How Transactions Work
When working with transactions in any system — whether it's ERP, CRM, Billing, or finance systems —the first step is always to identify the accounts involved.
From there, it’s about understanding the nature of each account, knowing how they behave in accounting, and then applying Debit or Credit based on what is happening in the transaction.
This is not a new mental model. It’s simply the way accounting has worked for decades.
But when stripped of jargon and overthinking, it becomes a lot more approachable, even for those outside the finance world.
The Clean Way to Approach Any Transaction
Whenever you handle a transaction:
Identify the accounts involved.
These could be any combination of Assets, Liabilities, Revenue, Expenses, or Equity.
There are no other master account types — all accounts will always fit into one of these five categories.
Understand the nature (natural side) of each account.
Every account type has a side where its balance naturally increases:
Assets and Expenses: Increase on Debit.
Liabilities, Revenue, and Equity: Increase on Credit.
Observe what’s happening to each account in the transaction.
Is the account balance increasing or decreasing?
Based on the account’s nature and what’s happening, decide:
If the account is increasing, post to its natural side.
If the account is decreasing, post to the opposite side.
The rest is mechanical balancing.This framing works cleanly in any transaction, regardless of complexity.
Important Notes to Keep in Mind
All accounting entries should always involve these 5 master account types. There are no exceptions.
Transactions can happen between any of these accounts. There’s no rule that says it must always be between Asset and Liability — it can be Expense vs Liability, Liability vs Liability, or Expense vs Revenue.
Many times, the complexity is not in the Debit or Credit, but in correctly identifying the accounts involved and classifying them into their correct type. Once that’s done, the rest follows naturally by applying their behavior.
Example Scenarios (Real-World, Not Always Asset/Cash Focused)
Received ₹1,000 cash from a customer.
Accounts: Cash (Asset), Sales Revenue (Revenue).
Cash increases (Debit).
Revenue increases (Credit).
Paid ₹500 rent in cash.
Accounts: Cash (Asset), Rent Expense (Expense).
Cash decreases (Credit).
Expense increases (Debit).
Deferred Revenue recognition for 1 month of service.
Accounts: Deferred Revenue (Liability), Sales Revenue (Revenue).
Deferred Revenue decreases (Liability, Debit).
Sales Revenue increases (Revenue, Credit).
Accrued salaries at month-end (no cash yet).
Accounts: Salaries Expense (Expense), Accrued Salaries (Liability).
Expense increases (Debit).
Accrued Salaries increases (Liability, Credit).
Reclassifying short-term loan to long-term loan.
Accounts: Short-Term Loan Payable (Liability), Long-Term Loan Payable (Liability).
Short-Term Loan decreases (Debit).
Long-Term Loan increases (Credit).
Recording depreciation on machinery.
Accounts: Depreciation Expense (Expense), Accumulated Depreciation (Contra-Asset).
Expense increases (Debit).
Accumulated Depreciation increases (Credit — contra-asset, reduces asset book value).
Reference: The Five Master Account Types and Their Natural Sides
Account Type | Increases On | Decreases On | Examples |
Asset | Debit | Credit | Cash, Bank, Receivables, Inventory |
Liability | Credit | Debit | Payables, Loans, Deferred Revenue |
Equity | Credit | Debit | Capital, Retained Earnings |
Revenue | Credit | Debit | Sales Revenue, Interest Income |
Expense | Debit | Credit | Rent Expense, Depreciation, Salaries |
Closing Reflection
"Accounting always starts with identifying the accounts involved, knowing their type, and applying Debit or Credit based on their natural behavior and the change happening in the transaction.This is how accounting systems, ERPs, and finance teams have always done it.Clean, simple, and timeless."
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