Learning Debits & Credits

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Accounting systems are based on debits and credits. Each accounting transaction is like an equation, with debits on one side and equal credits on the other. In an accounting ledger, debits and credits are listed in columns, with debits to the left and credits to the right. The ledger also includes, in separate columns, the transaction date, and a complete description of the transaction, including the accounts debited and credited. The concept is simple, but knowing whether to debit or credit an account is not always intuitive. Understanding the basic principles will help you dissect most debit and credit scenarios.

  • Learn the five basic account types—assets, liabilities, revenue, expenses and equity. Assets are anything your company owns that is worth money. Liabilities are any money your business owes. Revenue is income from doing business. Expenses are monies spent to produce goods or provide services. Equity is the value of the business above money owed by the business.

  • Become familiar with how each account type affects your company's two main financial statements--the balance sheet and the profit and loss Statement. Your balance sheet shows your company's assets compared to your company's liabilities plus equity. Assets will be equal to liabilities plus equity. Your statement of profit and loss shows your company's income compared to expenses. The difference between income and expenses is your profit or loss.

  • Understand how debits and credits affect balance sheet accounts. Asset and liability accounts are increased by debits and decreased by credits.

  • Understand how debits and credits affect profit and loss statement accounts. Revenue and expense accounts are decreased by debits and increased by credits.

  • Commit the rules of debits and credits to memory by recording simple accounting transactions. Spend some time at this every day. Debits and credits become intuitive only with a lot of practice.

Tips & Warnings

  • When recording multiple transactions manually, always total the debits and credits at the bottom of each column. If the columns are not equal, you will know that you have made an error in recording your figures.
  • Avoid thinking of the terms "debit" or "credit" as meaning more or less money in an account. The terms themselves only describe the column in which they are recorded. The account type determines whether a debit or credit increases or decreases the account.
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