At its most basic, accounting consists of individual “journal entries.”  Every business transaction is entered into a “ledger,” which may exist on paper or within a computer program.  A single entry always affects at least two distinct accounts, so each journal entry actually consists of two lines on the ledger, a “debit” and a “credit.”

A debit is the line of a journal entry set to the left on the ledger.  A debit may be:

        An increase in assets (such as the purchase of equipment or a deposit into a checking account,)

        A decrease in liabilities (such as the principal portion of a loan payment,)

        A decrease in equity (such as a dividend or distribution to an owner,) or

        An expense.

A credit is the line of a journal entry set to the right on the ledger.  A credit may be:

        A decrease in assets (such as writing a check to pay a bill,)

        An increase in liabilities (such as taking out a loan,)

        An increase in equity (such as when an owner invests cash into the business,) or

        Revenue or other income.

Because two accounts are always involved, this process is referred to as, “double-entry accounting.”