The tricky part in understanding these two categorizations is that both debits and credits have different impacts across different types of accounts. Credits happen when things are subtracted. To recap: Debits generally happen when things are added to accounts. And this happens for every single transaction (which is part of why bookkeeping can be time-consuming). So every time you make money or spend money, just remember that at least one account will be debited and one will be credited. This method is used within your business’ general ledger and ultimately gives you the basis for your financial reports such as the balance sheet and income statement. Double-entry accounting states that for every financial transaction recorded at least two accounts in your chart of accounts are affected-and they’re affected in equal and opposite ways.
To fully understand debits and credits, you first need to understand the concept of double-entry accounting. Depending on the account in question, debiting it can cause the number you see to increase or decrease. While this rule stands, it’s also where things get tricky.
Generally speaking, a debit refers to any money that is coming into an account, while a credit refers to any money that is leaving one.Īccounts: The different reports your company keeps to sort and store your business transactions. Put simply, whenever you add or subtract money from an account you’re using debits and credits. That’s because they’re the foundation of your general ledger and every account in your chart of accounts. Understanding the difference between debit entries and credit entries in your books plays a large role in understanding the overall financial health of your business. But as a business owner looking over financials, knowing the basic rules of debits and credits in accounting is crucial. But while we might hear them a lot, that doesn’t mean debits and credits are simple concepts-it can be tricky to wrap your head around how each classification works. Anyone with a checking account should be relatively familiar with them. You don’t have to be an accounting expert to have heard the words “debits” and “credits” thrown around.
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