Setting Up Your Chart of Accounts
Step-by-step guide to creating and organizing a chart of accounts for your business. Learn which accounts you need and how to structure them.
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Beginner Level
Understanding Debit and Credit Basics
Master the fundamental rule that powers double-entry bookkeeping. Every debit and credit you’ll ever record follows this core principle.
Why Debits and Credits Matter
You’ve probably heard these terms thrown around if you’re new to accounting. Thing is, they’re not complicated once you understand the basic concept. Debits and credits aren’t mysterious — they’re just a way of recording which direction money or value moves in a transaction.
In double-entry bookkeeping, every transaction affects at least two accounts. One account gets debited, another gets credited. This creates balance. It’s the reason the accounting equation (Assets = Liabilities + Equity) always stays balanced. We’ll walk you through how this works so it actually makes sense.
The Core Rule You Need to Know
This single principle determines how every transaction gets recorded
01
Debits Go Left
Debit entries appear on the left side of an account. They increase asset accounts and expense accounts. They decrease liability accounts, equity accounts, and revenue accounts.
02
Credits Go Right
Credit entries appear on the right side. They do the opposite of debits. Credits increase liabilities, equity, and revenue. They decrease assets and expenses.
03
They Must Balance
Total debits must equal total credits. Always. This balance is what makes double-entry bookkeeping work. It’s your built-in error check.
How Debits and Credits Work by Account Type
The direction changes depending on what type of account you’re dealing with. Assets, liabilities, equity, revenue, and expenses all behave differently. Here’s what you need to remember:
Asset Accounts
Debits increase, credits decrease. When you buy equipment, you debit the equipment account. When you sell it, you credit the account.
Liability Accounts
Credits increase, debits decrease. You owe money? That’s a credit balance. When you pay down debt, you debit the liability account.
Equity Accounts
Credits increase owner’s equity, debits decrease it. Your investment goes in as a credit. Withdrawals are debits.
Revenue Accounts
Credits increase revenue, debits decrease it. When you make a sale, you credit the revenue account. This seems backward until you remember that revenue increases equity.
Expense Accounts
Debits increase expenses, credits decrease them. You spend money on rent? Debit the rent expense. This makes sense because expenses reduce profit.
Real Example: Recording a Transaction
Let’s say your business receives RM5,000 in cash from a customer. You’d record this in two accounts:
Cash Account
Debit RM5,000
Cash is an asset. Assets increase with debits.
Revenue Account
Credit RM5,000
Revenue increases with credits. The totals balance.
Notice how the debit equals the credit? That’s the double-entry system working. Both sides of the equation stay balanced. Your total debits recorded today must equal your total credits. If they don’t, you’ve made an error somewhere.
How to Remember Which Way to Record
Most accountants develop mental shortcuts after a while. Here are some that actually work:
Think of T-Accounts
Visualize each account as a T. The left side is debit, the right is credit. This simple shape helps you remember which side is which when you’re confused.
Assets Behave Like Debits
Assets are what your business owns. They increase with debits and decrease with credits. It’s straightforward — more stuff means a debit.
Liabilities Are Opposite
Liabilities are what you owe. They work opposite to assets. Credits increase liabilities, debits decrease them. Owing more money? That’s a credit.
Remember the Equation
Assets = Liabilities + Equity. Keep this balanced. Every transaction affects this equation on both sides, which is why debits must equal credits.
Key Points to Remember
Debits and Credits Balance
In every transaction, debits must equal credits. This is the foundation of double-entry bookkeeping. It’s not optional — it’s the rule.
Account Type Determines Direction
The same transaction direction (debit or credit) doesn’t work for every account. Assets increase with debits, but liabilities increase with credits. Know your account types.
The Equation Always Balances
Assets = Liabilities + Equity. Every debit and credit you record maintains this balance. If your books don’t balance, you’ve made a mistake. This is your quality control.
Practice Makes It Automatic
The first few transactions might feel confusing. But after recording 20 or 30 entries, you’ll stop thinking about which side goes where. It becomes automatic.
Educational Purpose
This article provides foundational information about debit and credit concepts in double-entry bookkeeping. It’s designed to help you understand basic accounting principles. For specific accounting guidance related to your business or tax situation in Malaysia, consult with a qualified accountant or tax professional who understands your circumstances. Accounting rules and tax requirements vary by business type and situation. The examples shown here are simplified for learning purposes.
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