Debits and Credits are confusing terms to anyone that has not been immersed in accounting for years. Most of us find that they inherently sound like they are applied the opposite from what we expect.
A debit is a posting that increases value in an account. A credit removes value from the account.
A debit adds, a credit subtracts. Does that sound backwards? Perhaps it is due to our experience with banks, where we see money added to our account referred to as a credit, and money taken out referred to as a debit. Those references, however, are from the bank’s perspective, not ours.
Your account at the bank represents a debt that they owe you. If they credit your account, they owe you a little more. The negative balance in their books goes a little farther negative.
A better example is to consider a simple business transaction. If you sell candy bars, and I hand you a dollar, you now owe me a candy bar. By accepting the dollar–adding to your cash account–you created a debt to me. Adding value is a debit.
In the other half of the transaction, you hand me a candy bar. Subtracting a candy bar from your inventory is a credit, since you are owed a dollar for that (or, if I already paid you, your debt is taken care of).
As long as the debits and credits on any given transaction equally balance each other out, the books are in balance.
Got that? Now forget about it. For the average business owner trying to understand their books, thinking in terms of debit/credit is not helpful. Instead, think of Money In/Money Out. Or, in more generic terms, Value Added/Value Subtracted.
For every transaction or activity in your accounting system, the total value added to any accounts must balance the total value subtracted from other accounts. That concept is much easier to understand and remember.