Debits and Credits

DEBITS AND CREDITS: BUSINESS ACCOUNTING 101

Attention! Here’s the acid torture test of accounting. If you have ever had trouble understanding accounting and bookkeeping, it ismost likely because of this one concept, debits and credits. It is the hardest task in all of accounting. But before you can go anywhere else, you must first get past this point.

Debits

Here is all you need to know about debits:

Debits are on the left.

Got that? Alright! Next:

Credits

Here is all you need to know about credits.

Credits are on the right.

Got that? Alright!

Debits are on the LEFT.

Credits are on the RIGHT.

Accounting teachers and professors in countless classes over the centuries have tried to get people to remove excess mental baggage. They’ve tried reason. They’ve tried persuasion. They tried torture. Still people struggle with this concept.

Debits are on the left! Credits are on the right! Period!

Welcome to your obstacle course. Here’s where we’re going to put this concept to work. (Grin!)Assets are on the left. Debits are on the left. Do any of you see a connection? Whenever you code an entry to an asset account that increases the amount, you put the amount in the debit column.And yes, those assets include cash. If money is received, cash is debited. Not credited, DEBITED!

Why? Because cash is an asset. Assets are on the left. Debits are on the left. Increases to assets are debited.

Over here are the liabilities and the equity.

The same thing goes for them. They are on the right. Credits are on the right.

If you take out a loan, you will credit your liability. That is because loans increase liabilities. Liabilities are on the right. Credits are on the right.

Now what about the reverse? What about when assets or other stuff goes down? Well, the reverse is the reverse!

Credit assets to remove value. Debit liabilities and equity to make them go down.

When you write a check, you credit cash. Checks reduce cash. Cash is an asset. Assets are on the left. Credits are on the right. Credits make assets go down. They are the reverse of debits.

When you pay off a loan, you debit liabilities. Liabilities are on the right. Debits are on the left. Debits make liabilities go down. They are the reverse of credits.

REMINDER:

Assets are what you own. Liabilities are what you owe. Equity is what’s left over. It is your net worth.

ASSETS = LIABILITIES + OWNERS EQUITY

Assets are on the left. Liabilities and Equities are on the right! I will say this again. Debits are on the left. Credits are on the right. Period!

Next!

Equity consists of (1) money owners have invested in the company and (2) the results of operations. That’s net income to you.

Net income comes from where? The Income Statement. Revenues minus expenses are net income. Net income is an item in Equity.

Rely on this!

Equity is on the Right. The Income Statement accounts all result in net income. Net income is in equity.

This means that anything that increases net income will increase equity.

Revenues increase net income. They are credited. Because they are on the right!

Expenses decrease net income. They are debited. Because they are on the left!

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