Accounting can be a complicated and daunting task, especially when understanding the terminology used in the field.
Two of the most common terms you will come across are debit and credit, but what do they mean exactly? Let’s break down these two important accounting terms so you can keep your business finances organized.
What is a Debit?
A debit is an entry on the left side of an account in accounting or bookkeeping. When you make a purchase or receive money, the amount is entered as a debit.
A debit increases assets or expenses and decreases liabilities, equity, or income. Debits are also used when transferring funds from one account to another.
When you pay for goods or services with cash, this is recorded as a debit to your company’s asset account called Cash.
What is a Credit?
When you receive money from customers for goods or services that were sold, it is recorded as a credit to your company’s Accounts Receivable account. A credit is an entry on the right side of an account in accounting or bookkeeping.
A credit decreases assets or expenses and increases liabilities, equity, or income. Credits are also used when transferring funds from one account to another; for example, if you received money from a customer for goods sold, this would be recorded as a credit to your company’s Accounts Receivable account.
Debit and Credit Rules
The general rule of thumb when it comes to debits and credits is this: If something comes in (cash), it’s recorded as a debit; if something goes out (goods/services sold), it’s recorded as a credit.
It’s important to understand these rules because they will help you accurately track all of your business transactions and ensure that your financial records are up-to-date and accurate at all times.
Conclusion:
Debits and credits may seem confusing at first glance, but understanding them will help keep your business finances organized and accurate.
The key takeaway here is that if something comes into your business (e.g., cash), then it should be recorded as a debit; if something goes out (e.g., goods/services sold), then it should be recorded as a credit).
These rules will help ensure that all of your financial records are properly accounted for!