![]() ![]() ![]() We can clarify our understanding of what is going on with credits and debits by returning to the Debits = Credits equation. ![]() When discussing credits and debits, we need to be absolutely certain we understand what we are doing to what side of the accounting equation. This leads to much confusion when referring to credits and debits. Additionally, crediting an account such as accounts payable will ultimately increase the balance of a company. Therefore, if a financial transaction causes a company's checking account to be credited, its balance decreases. In the accounting world, financial transactions are looked at as if from the bank's point of view. This point of view differs from that in the accounting world because you are viewing your checking account through your own personal perspective, not the bank's perspective. ![]() If you add money to your checking account, your checking account is credited and your bank account increases. In your normal checking account, credits usually refer to money increasing in your account, and debits usually refer to decreasing the money in your account. You need to disregard your traditional understanding of how credits work in your everyday life. We need to clarify one more very confusing point when dealing with double-entry accounting, and debits and credits specifically. Order and consistency when representing debits and credits are paramount. It is equally important to note that with the equation Debits = Credits, the left side must always contain debits, and the right side must contain only credits. The cash did not just disappear into thin air it turned into business supplies, thus this change is reflected correctly in double-entry accounting. However, in double-entry accounting, you also need to add this amount to inventory, as shown: For example, if your company purchases $800 in business supplies, you would be inclined to think of taking $800 cash out of the checking account, and you would be right. The theory behind this is that for every transaction, you are taking money away from one account and adding it to another account. In double-entry accounting, every financial transaction must have two journal entries, or affect two different accounts: the debit transaction and the credit transaction. Because debits must always equal credits, it is common practice to use double- entry accounting to prevent errors. This is yet another extremely important accounting equation to remember. When using double-entry accounting, debits must always equal credits: They can use the single-entry, or one-column method, or the more widely used double-entry, or two-column, method to show debits and credits. There are two methods accountants use to show credits and debits for financial transactions. In this representation, you draw a big capital letter "T" on a paper, and on one side of the T you place your debits on the other side of the T, you place your credits and on the top of the T, you usually name the item you are debiting or crediting, as shown: When representing the debits and credits equation, accountants and bookkeepers commonly use the "T" accounting method. In bookkeeping texts, you will see debits abbreviated as "Dr." and credits abbreviated as "Cr." Quite simply, either you are crediting money or debiting money to the overall balance. The balance sheet is also commonly referred to as the statement of financial position.Įvery accounting transaction must be either a credit or debit. The balance sheet is derived using the accounting equation. It summarizes a company's assets, liabilities, and owners' equity. A company will use a Balance Sheet to summarize its financial position at a given point in time. ![]()
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