Debits Credits

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Debits Credits

In the "ole" days (manual bookkeeping systems), mastering debits and credits was an absolute necessity. Nowadays, with the advent of computerized bookkeeping and accounting the software using modules automatically handles this task. Does this mean you don't need to understand debits and credits ? Only in your dreams.

Although an airplane can be flown on auto-pilot, would you want to be on that plane without a trained pilot ? The same applies to using accounting and bookkeeping software. You need a properly trained bookkeeper or accountant that is also familiar with the software product in order to properly use the software.

That ole saying Garbage In – Garbage Out definitely applies here.

Debit and Credit Rules

How To Use and Apply The Debit and Credit Rules:

1. Determine the types of accounts the transactions affect-asset, liability, owner's equity, revenue, expense or draw/dividend account.

2. Determine the account's normal balance.

3. Determine if the transaction increases or decreases the account's balance.

4. Apply the debit and credit rules based on the type of account , its normal balance, and whether the balance of the account will increase or decrease.

The rules governing the use of debits and credits are noted below.

Changes to Debit Balances

All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends.

Changes to Credit Balances

All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity.

Totals Must Match

The total amount of debits must equal the total amount of credits in a transaction. Otherwise, an accounting transaction is said to be unbalanced.

Debits and Credits in Common Accounting Transactions

The following bullet points note the use of debits and credits in the more common business transactions:

Sale for cash: Debit the cash account | Credit the revenue account

Sale on credit: Debit the accounts receivable account | Credit the revenue account

Receive cash in payment of an account receivable: Debit the cash account | Credit the accounts receivable account

Purchase supplies from supplier for cash: Debit the supplies expense account | Credit the cash account

Purchase supplies from supplier on credit: Debit the supplies expense account | Credit the accounts payable account

Purchase inventory from supplier for cash: Debit the inventory account | Credit the cash account

Purchase inventory from supplier on credit: Debit the inventory account | Credit the accounts payable account

Pay employees: Debit the wages expense and payroll tax accounts | Credit the cash account

Take out a loan: Debit cash account | Credit loans payable account

Repay a loan: Debit loans payable account | Credit cash account

Debits Credits