The correct use of debits and credits is extremely important when it comes to basic accounting practices. If your knowledge and ability to implement these elements is decent, it will be a great way to advance in the field of accounting. Therefore, in turn, if you do not have a good understanding of what these concepts are, you will have a lot of difficulty advancing in the accounting career. So, as you can see, the use of techniques is very important, so I have decided to help explain them as a way to expand your knowledge.
The first thing to do is explain what is meant by debits and credits. Debits and credits are reserve maintenance terms for accounts, as each account we deal with has both a debit and a credit side. These debits and credits are recorded in two separate columns with the debit on the left side and the credit on the right side. When they are separated, it allows the accounts to be added together and kept in order. The main use of debits and credits is to change the balance of an account. Knowing which side of the account to put recent activity on is very important, so you have to memorize which side is increasing and which side is decreasing to keep your books up to date. It is also important that you know the debits and credits so that you can be fast and efficient, as well as be up to date with your accounting so that you can also keep the business or your work online.
Accountants will say things like I added five hundred dollars as a debit to the cash balance. For all asset accounts like Cash, they increase on the debit side of the account, so when you add money to the account, it is placed on the debit side in the general journal. Whereas if you spend cash to buy something, it will say credit the cash account because that reduces the total amount in the account. It is very important to keep up with the accounts and increase and decrease the totals on the correct side of the column so that all asset accounts increase their total on the debit side and in turn decrease on the credit side. Asset accounts include cash; accounts receivable, land or any item of economic value owned by an individual or corporation, especially those that can be converted into cash. In the case of liabilities, they increase on the credit side and actually decrease on the debit side of the account. Liabilities can include accounts payable, taxes payable, unearned income and notes payable, the actual definition is a debt assumed by a business entity as a result of its borrowing activities or other tax obligations. The last part of the balance sheet equation is the owner’s equity, which has the same increase (on the credit side) and decrease (obviously on the debit side). Owner’s equity is the owner’s rights to the assets of the business; includes Capital and Draft accounts (also known as personal account, money used for personal purposes). The owner’s equity also includes the income statement that houses all income and expense accounts. Income increases on the credit side and decreases on the debit side. Expense accounts are the opposite of income accounts to which they are added using the debit side and taken from the credit side of the account. To see an example of using credit and debit accounting, let’s say you borrow cash from a local bank loan. To record it on your books, you would increase the cash on the debit side because you are adding to the total, and you would also add it to the credit side of the loan payable as a liability. When you do something with a debit, you also need to do something with a credit account. That is why when you added to the cash debit you also had to do something with a credit, so you add a loan to the liability. That was a very basic example, but it shows you how debit and credit records are used in early ledger journals.
As you have read, debits and credits are very important as a basic accounting principle. Using debits and credits in the right way is the most basic form of bookkeeping. Without them you can’t do much more. You need to be aware of these before anything you do in accounting without them, you really can’t do any other form of accounting within the accounting field. I hope this article has helped you with the basic use of debit and credit accounting.
By: Bill McDougall
