Background YiQi YangYin Decoction (YQ) is a modern Chinese formula composed by the guidance of traditional Chinese medicine theory, which consists of nine traditional Chinese medicines and is applied to treat type 2 diabetes mellitus (T2DM) with nonalcoholic fatty liver in clinic in China for more than a decade. This study aims to evaluate the antidiabetes and lipid-lowering effect of YQ and explore the possible mechanisms of this action. Methods T2DM rat models were established and given YQ at three different doses for three weeks. Tissues, including pancreas islet and liver, and blood serum were collected. The levels of fasting blood glucose (FBG), fasting insulin (Fins), lipid index, such as total cholesterol (TC), triglyceride (TG), high-density lipoprotein (HDL), and low-density lipoprotein (LDL), and hepatic function index such as alanine aminotransferase (ALT), aspartate aminotransferase (AST), and alkaline phosphatase (ALP) in serum were measured. Pancreas islet damage and liver damage were observed by hematoxylin and eosin staining. The glycogen content and lipid accumulation in liver were determined by periodic acid-Schiff (PAS) staining and Oil Red O staining. The expression levels of insulin receptor substrate 2 (IRS-2), phosphatidylinositol 3 kinase-associated p85alpha (PI3K p85α), AKT, and Glucose Transporter 2 (Glut4) in pancreas islet and AMP-activated protein kinase alpha (AMPKα), sterol regulatory element-binding protein 1c (SREBP1c), acetyl-CoA carboxylase (ACC1), and peroxisome proliferator‐activated receptor-α (PPARα) in liver were determined by western blotting. The relative expressions of ACC1, fatty acid synthase (FAS), stearoyl-CoA desaturase 1 (SCD1), carnitine palmityl transferase-1 (CPT-1), and SREBP-1 mRNA were detected by qRT-PCR. Results After administering YiQi for three weeks, the levels of fast blood glucose, fasting insulin, TC, TG, LDL, ALT, AST, and ALP were significantly decreased, while HDL significantly increased compared with the model group. YQ could obviously attenuate pancreatic damage and improve islet α- and ß-cell survival compared with the model group. Furthermore, YQ could attenuate hepatic damage caused by lipid accumulation, decrease the content of lipid, and increase the hepatic glycogen content, compared with the model group. In addition, YQ remarkably elevated the proteins expression of p-PI3K, p-AKT, and GLUT4 in pancreas islet and elevated the proteins expression of p-PI3K, p-AKT, GLUT4, p-AMPK, SREBP1, and PPARα and inhibited the expression of p-ACC1 in liver. Besides, YQ reduced the relative expression of ACC1, FAS, SERBP-1c, and SCD mRNA along with the decreased production of CPT-1 mRNA. Conclusions YQ could attenuate type 2 diabetes mellitus by improving islet α- and ß-cells via IRS-2/AKT/GLUT4 pathway and nonalcoholic fatty liver by ameliorating lipid accumulation via AMPK/PPARα/SREBP1/ACC1 pathway.