Debit and credit: double-entry bookkeeping in plain language
Written by Ilias Aarrass6 min read · Published on · Last reviewed on 
In short
In double-entry bookkeeping every entry has a debit and a credit side that match: assets and costs increase on the debit side, liabilities, equity and income on the credit side, which is why a private withdrawal affects your equity rather than your profit.
- A sales invoice is recorded as debtors debit against turnover and VAT payable credit.
- A balance sheet that does not balance is almost always caused by an entry missing one side.
- VAT runs through its own account: VAT charged as credit, VAT reclaimed as debit, and you remit the difference.
- The most common mistake is recording a private withdrawal as a cost, which understates your profit.
Debit and credit are the two words every new entrepreneur stumbles over. Your software usually fills them in for you, so you can get quite far without understanding them. Still, it pays to grasp it once properly, because then you suddenly see why your VAT does not add up, why a private withdrawal does not reduce your profit and where a difference of a few euros comes from. This article explains it without jargon, with the journal entries freelancers meet most often.
Two sides that always match
Double-entry bookkeeping means every event is recorded in two places: where the money comes from and where it goes. Those two sides are called debit and credit, and in every entry they are equal. That is why something wrong stands out: if your balance sheet does not balance, one side has been forgotten.
Debit is on the left and credit on the right. An increase in what you own, such as money in the bank or a claim on a client, is recorded as a debit. An increase in where it comes from, such as turnover, a liability or your equity, is recorded as a credit. Costs are debits, income is credits. More on which accounts exist is in ledger accounts and your chart of accounts.
| Type of account | Increases | Decreases |
|---|---|---|
| Assets (bank, cash, debtors, equipment) | debit | credit |
| Liabilities (creditors, VAT, loans) | credit | debit |
| Equity | credit | debit |
| Costs | debit | credit |
| Income | credit | debit |
The four entries you need most often
Start with your sales invoice. You send an invoice for € 1,000 plus € 210 VAT. Your client owes you € 1,210, so your claim rises: debtors € 1,210 debit. Against that sit € 1,000 of turnover and € 210 of VAT you still have to remit, so both credit. When the client pays, you record bank € 1,210 debit and debtors € 1,210 credit; the claim disappears.
A purchase invoice is the mirror image: costs debit, the VAT you can reclaim debit, and the liability to your supplier credit. And the entry many people get stuck on: a private withdrawal. You record that as private debit and bank credit. It does not change your profit, because a withdrawal is not a cost; it is your own money leaving the business. See private withdrawals and deposits.
Journal entry for a sales invoice
- Debtors
- € 1,210 debit
- Turnover
- € 1,000 credit
- VAT payable at the standard rate
- € 210 credit
- On payment: bank
- € 1,210 debit
- On payment: debtors
- € 1,210 credit
Result: After both entries there is € 1,210 in the bank, your turnover is € 1,000 and you have a € 210 VAT liability. Exactly as expected, and the two sides match every time.
Why this helps with your VAT and your balance sheet
Once you see how VAT runs through its own account, you also understand why your VAT return and your turnover must reconcile. The VAT you charged sits as a credit on your VAT account, the VAT you reclaim as a debit, and the difference is what you remit. If they drift apart, there is an invoice with the wrong rate or a missing entry. How to perform that check is in checking your VAT before you file.
The same goes for your balance sheet. A balance sheet that does not balance is almost always caused by an entry with one side missing or where debit and credit are unequal. And a balance sheet that does balance but shows debtors too high means you have not matched payments. Read reading your balance sheet and profit and loss account to see how those two overviews connect.
Common mistakes
The three most common mistakes: recording a private withdrawal as a cost, recording a payment as new turnover when the invoice was already recorded, and forgetting to split the VAT on a purchase invoice so the gross amount stays in costs. All three show up in a balance sheet that does not make sense: costs too high, turnover too high or a VAT account that does not reconcile.
If you work with a spreadsheet rather than a package, in practice you usually keep single-entry records: income and expenses only. That is allowed for a small sole trader, but you lose the control double entry gives you. How to set that up sensibly is in bookkeeping in Excel, and when a package is better in choosing bookkeeping software.
- Every entry has two sides that match; if they do not, something is missing.
- Costs and assets are debits, income and liabilities are credits.
- A private withdrawal does not affect your profit, only your equity.
- Split the amount and the VAT on every purchase invoice, otherwise your return will be wrong.
Frequently asked questions
What do debit and credit mean?
Debit is the left side of an entry and credit the right. Assets and costs increase on the debit side; liabilities, equity and income increase on the credit side. In every entry the two sides match.
Do I have to use double entry as a freelancer?
The law prescribes no method; your records must be verifiable and your profit and VAT must be derivable from them. Almost all software uses double entry, and it gives you more control.
Why does a private withdrawal not reduce my profit?
Because it is not a cost but a shift of your own money. You record it against your private account within equity, not against a cost account.
What is a journal entry?
One entry with all the debit and credit lines that belong together, for example an invoice with turnover and VAT. Your software creates them automatically, but for corrections you sometimes type one manually.
Sources
- Setting up your recordsBelastingdienst · belastingdienst.nl
- Calculating VAT under the invoice systemBelastingdienst · belastingdienst.nl
Sources checked on
This article provides general information based on the rules known for 2026 and does not replace personal tax advice. For your specific situation, we're happy to take a look with you.
