To keep track of your success and grow your business, you need to understand the relationship between debit and credit. When you know what both terms mean and how debits and credits work together, you’ll understand how cash flows through your company. At that point, you’ll find it much easier to forecast future cash flow and make practical decisions about investment and expansion.

If all that sounds complex, don’t worry. We’ll touch on what debit and credit mean from an accounting perspective at the very beginning of this Countingup guide. Then, we’ll talk about cash flow statements, and cash flow forecasting. 

  • What is the relationship between debit and credit?
  • What’s double-entry bookkeeping?
  • What is a cash flow statement?
  • What is a cash flow forecast?

What is the relationship between debit and credit?

This article won’t focus on debit and credit from an accounting point of view. Instead, we’ll begin with a basic explanation of both terms to help you visualise the flow of cash through your company. 

In a nutshell, debit and credit are two halves of one financial transaction. You can think of them as best friends: you’ll never see debit without credit, and vice versa. Like buddies, they balance each other out. In very simple terms:

  • Credits decrease dividends, expense and asset accounts, and increase liability, equity and revenue accounts.
  • Debits increase dividends, expense and asset accounts, and decrease liability, equity and revenue accounts. 

One of the easiest ways to remember which accounts increase and which decrease with debits and credits is to use an accounting equation known as DEALER:

Dividends + Expenses + Assets = Liabilities + Owner’s Equity + Revenues

Credits increase everything on the left of the equation, and decrease everything on the right. Debits decrease everything on the left of the equation, and increase everything on the right.

What’s double-entry bookkeeping?

Debits and credits record the flow of money — both into and out of your organisation, and between accounts within your organisation. When you record debits and credits in this way, that’s double-entry bookkeeping. 

Every single financial transaction that happens in your company gets recorded in at least two accounts. If you create a balance sheet at the end of any given day, you’ll notice that the numbers at the bottom of both sides are the same.

Double-entry bookkeeping sounds confusing and time consuming. It can be — but most accounting experts agree that it’s the best way to track where the money coming into your organisation originates from, how it travels within your organisation, and where it goes when it leaves.

If you’re interested in learning more about debit and credit in accounting terms, check out our in-depth guide. To deep dive into balance sheets, click here

What is a cash flow statement?

Cash flow is the amount of money flowing into your organisation, and out of your organisation. With a cash flow statement in hand, you’ll know exactly how much cash you actually have on hand. 

Cash flow statements are useful from a practical standpoint. If you know how much cash you have, you can decide whether or not to purchase an asset outright. If you really need an asset and don’t have the cash on hand to buy it, you might have to get a loan.

Cash, and cash-equivalent assets — basically anything you can quickly turn into cash — are both assets, so they live on the left-hand side of the DEALER equation. When you add cash to a cash account, that’s a debit. When you withdraw cash, that’s a credit.

There are three main cash flow categories, all of which you’ll have to take into account to create a cash flow statement:

  • Cash flows from operations (CFO): This is the money you bring in or spend during regular business operations in a specific time period.
  • Cash flows from investing (CFI): This is the investment-related money you make or spend in a specific time period.
  • Cash flows from financing (CFF): This is the cash flowing into your business from new debt or equity, minus the cash flowing out via dividends and debt repayment.

To calculate total cash flow, you simply add up all of your incoming cash and subtract all of your outgoing cash in each category. What you’re left with is cash on hand. 

What is a cash flow forecast?

To forecast cash flow accurately, you’ll need to calculate cash flow on a regular basis for a number of months. Cash flow can vary quite a bit from month to month: if you invest in a new piece of machinery in June, for instance, you might have negative cash flow for the month. That’s not necessarily a bad thing — after all, maybe you’ll use the machine to increase your production capacity, in which case your profitability might increase.

Sometimes, you might see a large positive cash flow because of an incoming loan. While great on paper, that loan is actually a liability, so it’s not necessarily an indicator of your company’s success.

You can use this five-step process to forecast cash flow:

  1. Make assumptions: You can make cash flow assumptions based on previous cash flow statements, industry trends and information you’ve gathered from clients and suppliers.
  2. Forecast your income: Include sales you’re likely to make, installment payments you’re likely to receive, upcoming promotions and other factors.
  3. Estimate cash inflow: List plans to sell assets or invest personal funds in your business here.
  4. Subtract cash outflow and expenses: Include rent payments, salaries and other bills here.
  5. Calculate your forecast: Subtract expenses and outflow from your cash inflow and estimated income to come up with a cash flow forecast.

You can use your cash flow forecast to update investors, apply for business loans or make investment or hiring decisions. 

Make debit and credit simple with Countingup

Accounting can be hard to wrap your head around: credit and debit, T accounts, balance sheets and cash flow statements can feel like alien territory if you’re not an accountant. If you’re number-shy and you’d prefer to focus on other aspects of your business, Countingup can help. Countingup combines a business current account and accounting software in one handy app.

When you subscribe to, you get automatic expense categorisation, instant invoicing, receipt capture tools and intuitive cash flow insights to help you understand your business finances. Find out more about Countingup here.