What Is a Debit and How Does It Work? (With Examples)

Rachel Rotich

Updated October 26, 2022

Published February 4, 2020

Rachel Rotich is a Certified Public Accountant, Part II and a freelance writer with a Bachelor of Commerce in banking and finance. Besides writing on finance topics, she loves to assist clients with their projects and offer career advice.

Graphic illustration of the differences between credit and debit.

In business, debits function somewhat differently than they do in personal accounting. A debit may represent the decrease in an account's balance and the rise in an account's expenditure, dividend, loss or asset balance. Being familiar with debits and how they work with financial statements can help you maintain a company's accounts and ensure accurate transactions.

In this article, we discuss what a debit is, explain how it works, list the differences between debit cards and credit cards and share examples of debits.

What is a debit?

A debit is a financial entry you add to the left side of  a T-account, which shows debit and credit transactions within a financial account. Debits may raise the assets or lower the liabilities. You can consider it the opposite of a credit. For example, a rise in assets or expenses and a loss in revenues, liabilities or equity make up a debit transaction.

Related: Your Guide to Careers in Finance

How does a debit work?

The debit component is an integral part of the double-entry accounting system. With this system, it's necessary to keep a pair of records for every purchase. If you have two accounts, you'd debit one and credit the other. Whenever you add up your debits and credits, the total should be zero. Expense, asset and sometimes equity accounts are examples of accounts that may have negative balances. This shows that an asset account is going to grow when you make a debit entry.

Certain accounts in financial accounting systems have natural balances. Mostly, you may see negative balances in items like assets and expenditures as balances in equity accounts, liability accounts and income accounts that all go toward credits. These accounts could incur a reduction in balance if you make a debit to one of them. On the balance sheet, the debits would represent the positive values of assets, and the credits would represent the negative values of costs.

Related: Learn About General Ledgers

What are debit notes?

Debit notes, also known as debit receipts, are documents that sellers use to remind buyers of their debts or documents that buyers use when returning goods received on credit to sellers. Like invoices, debit notes feature in commercial transactions to document the creation of legal debit entries in a business. In contrast to credit notes, which document new purchases, debit notes reflect changes to previous transactions, such as refunds or adjustments. For instance, when you send back used machinery to a vendor, you may send a debit note and require the vendor to verify the requested refund amount.

A business may issue a debit note in response to a credit note. Consider issuing a debit note to rectify the situation if there's an error on a purchase, sales or loan invoice.

Related: Understanding Accounting Recording (With Examples)

Debit cards vs. credit cards

Debit cards may appear like credit cards, but they don't access the same financial system. Each has a unique identification code, expiry date and 16-digit number on the front. Here are some key distinctions between debit and credit cards:

Debit cards

You can use your debit card to spend the money that's available in your bank account. With a debit card, you automatically deduct money from your checking or savings account, so there's no risk of overspending. There are often no costs connected with using a debit card unless you overdraw your account and the bank charges you a fee, such as making a purchase that's more than the amount in your account. The card reader for a dual-purpose card may prompt you to choose between debit and credit while making a transaction.

When making a purchase using a debit card, you provide a personal identification number (PIN) to verify your identity. You may also be eligible for cash back when using a debit card. Comparable to making a purchase and withdrawing money from an automated teller machine (ATM), this method allows you to streamline your financial dealings. If you use it like a credit card, you usually sign a receipt instead of entering your PIN. Here are a few examples of debit cards:

  • Standard debit cards: Typically, this card enables you to do everyday transactions and deduct cash from your account. You may use a standard debit card for purchases made online or in store and for cash withdrawals at financial institutions.

  • Electronic benefits transfer (EBT) cards: The federal and state authorities provide these cards to enable you to use benefits when making purchases. The government agency in charge of the EBT program load funds onto these cards, which you may use for certain types of transactions.

  • Prepaid debit cards: This card allows those who don't have bank accounts to make electronic purchases. To use a prepaid debit card and make purchases or get cash from an ATM, you load it with funds first.

Related: What Is Finance? A Definitive Guide and 12 Career Options

Credit cards

Users may borrow money from the credit card issuer, often a bank or financial organization, which requires them to repay the principal plus interest on any amounts borrowed. Cardholders repay the funds according to the issuing institution's terms and circumstances. It's common for credit card customers to get perks that debit card members don't get, such as cash back, cash discounts and miles for travel. Customers who are careful with their money may boost their credit ratings when they demonstrate a track record of prudent spending and timely payments, as credit reports show a cardholder's spending habits.

Credit cards may provide better security than debit cards. Customers using credit cards have the option to report their cards lost or stolen. As long as they report it quickly, they're only responsible for a small number of fraudulent charges made after discovering the card was missing or stolen. Here are some types of credit cards available to consumers based on credit approval:

  • Standard cards: These cards offer consumers access to an extended credit line. With a standard credit card, you may carry a debt from month to month up to your card's credit limit.

  • Rewards cards: Reward cards provide customers with special benefits. You mostly find rewards credit cards in either cash back, points or travel categories.

  • Secured credit cards: The issuer requires an initial cash deposit as collateral. People with or without a damaged credit history might apply for secured credit cards.

  • Charge cards: These cards don't have a fixed monthly spending limit, and they require full payment every month, as they prohibit carrying debt from month to month. Depending on the terms of your card agreement, a late payment may result in fees, limits on your ability to make purchases or even the termination of your card.

Related: The Field of Finance: Definition, Types and 9 Careers To Pursue

Advantages of debit vs. credit cards

Using either debit or credit cards has certain benefits. The most significant advantage of debit cards over credit cards is the absence of interest, billing cycles and finance costs. Your debt may also remain controllable with a debit card compared to an unsecured credit card. You can only use a debit card for purchases you have the funds to cover.

Related: Guide to Double-Entry Accounting (With Examples)

Examples of debits

Here are examples of debits to help deepen your understanding of debits in business accounting:

Technology company example

A company making website applications decides to sell $5,000,000 worth of website applications to another firm. The company's bookkeepers record a $5,000,000 debit. That amount shows up on the balance sheet as a corresponding rise in credit inventory cash.

Bookstore example

A bookstore decides to increase its sales and offers discounts. The bookstore makes $60,000 from book sales, so it makes a $60,000 debit to its cash account and a $60,000 credit to its books or inventory account. According to its double-entry bookkeeping system, the bookshop has $60,000 more in cash and $60,000 less in books.

Cash example

A business receives $10,000 in cash and debits the cash account with the same amount in the journal entry, signifying an increase in cash on hand. In a separate event, the company makes a cash payment of $5,000. Cash is reducing, so the company credits the cash account in the journal entry with the $5,000. A debit increases and the credit reduces in the income statement.

Explore more articles