Debits and credits, just enough
“A company takes out a $1,000 loan. How is it recorded?”
You won't be grilled on bookkeeping, but knowing that every transaction has two sides makes every “walk me through” question easier.
Debit means left, credit means right. Assets sit on the left, so debits increase them; liabilities and equity sit on the right, so credits increase them.
Two sides of every transaction
Double-entry bookkeeping just means writing down where value came from and where it went. Take out a loan: cash came in (an asset rises) and the company now owes the bank (a liability rises). Two entries, same amount.
Accountants call the left-hand entry a debit and the right-hand one a credit. The words don't mean good or bad. They only say which side of the ledger a number lands on, and in every entry the debits equal the credits.
- 1Borrow $1,000: debit cash $1,000, credit loan $1,000. Both sides rise by $1,000.
- 2Sell $50 of goods for cash: debit cash $50, credit revenue $50. Revenue flows into equity, so both sides rise by $50.
- 3Pay a $200 supplier bill: debit payables $200, credit cash $200. Both sides fall by $200.
Predict it: up, down, or the same?
In banking interviews, think in statements, not ledgers: “cash goes up by $1,000 and debt goes up by $1,000” is all anyone needs to hear.
Say it like this
Every transaction is recorded twice, once as a debit and once as a credit, and the two are always equal. Debits increase assets and expenses; credits increase liabilities, equity and revenue. If a company borrows $1,000, cash is debited and the loan is credited, so assets and liabilities both rise by $1,000 and the balance sheet stays balanced.
Traps to avoid
- ✕Thinking debit means bad or credit means good. They're just left and right.
- ✕Recording a loan as revenue. Borrowing isn't earning.
- ✕Over-preparing bookkeeping at the expense of how transactions flow through the three statements.
What they'll ask next
›Does paying a bill create an expense?
Not by itself: the expense was recorded when the bill arrived. Paying it just lowers cash and payables.
›Why do debits always equal credits?
Because each entry records both where value came from and where it went, which is what keeps the balance sheet balanced.
›What does a debit do to an expense account?
It increases it. Expenses reduce equity, which is why they sit on the debit side.
Check yourself
A company takes out a $1,000 bank loan. How is it recorded?