Don’t know your debits from your credits? Here’s a quick primer on how basic bookkeeping works and an easy way to understand debits and credits.
First, know that debits are not “deductions” and credits are not “increases”. Debit and credit are the names of the columns on bookkeeping ledgers (debit is the column on the left and credit is the column on the right).
In double entry accounting (bookkeeping) the sum of each column must equal the other. In other words, the sum of all of the debits must equal the sum of all of the credits. By making sure that the sum of each column equals the other, the bookkeeper can eliminate arithmetic errors.
To make an entry, the bookkeeper makes one or more entries on the debit side of the ledger (debits) and one or more entries on the credit side (credits). All entries are positive numbers and debits must equal credits.
Into which column do you place any particular entry? A simple way to remember is that the accounts that represent your money increase with debits and decrease with credits. All other accounts are the reverse – they increase with credits and decrease with debits.
What are the “money” accounts? Those that represent actual money (cash, accounts receivable, etc.); assets (inventory, equipment, etc.); and, expenses (basically money that you’ve spent with others). In other words, assets and expenses are debit up, credit down – otherwise it’s debit down, credit up.
As an example, you start your business with $10,000 with which you open a business checking account. Your first bookkeeping entries would be to debit the account “checking account” (making it go up) and credit the account for paid in capital (making it go up as well).
You make your first sale for $1,000 worth of services. The customer paid cash which you deposit into the business checking account. You would credit an account which represented sales $1,000 and it would increase in value. You would offset that entry with a $1,000 debit to the account “checking account” and it would also increase in value.
The end of the month comes along and you write a check to pay your electric bill. You would debit the expense account for utilities and increase its value. To offset that entry, you would credit the account “checking account” and it would decrease in value.
Remember, debits can increase account values and credits can decrease them – which is which depends on the account type.
While bookkeeping can seem confusing it quickly becomes easy with practice. Basic bookkeeping is the foundation of financial reporting. Gaining comfort with it will allow you to manage more effectively your business.