Accounting – Debits and Credits Explained
When you considered becoming your own boss you probably did not think you would be learning an entirely new language just to do so. But accounting terms are some things that most every business owner will need to get used to.
Two of the most common accounting terms – debits and credits – are explained below to help you understand how they work in business.
Changes in Asset Accounts
The things that your company owns in business such as cash, cash equivalents, furniture, equipment, machinery, and land are assets. You list each account category and keep running totals of their balance so that you can report them on the Balance Sheet. Assets have a debit balance. To record an increase to this account, enter the amount as a debit in your journal. A corresponding credit is entered to show a decrease in an asset’s balance.
Changes in Liability Accounts
The total outstanding debt that a company owes its vendors is called a liability. These are debts that can be categorized as short or long-term. To show an increase in liabilities, enter a credit in your journal. As payments are made to decrease the balance you can show this by entering a debit to the Liability account.
Changes in Equity Accounts
Equity is the value of your company to its owners and stakeholders. Equity accounts carry a credit balance. When you reinvest profits or inject additional funds from owners the account increases with a credit entry on your books. To reduce the balance, record a debit to the Equity account.
Changes in Revenue Accounts
All sources of income that your company earns or receives are considered Revenue. These accounts carry a credit balance and are increased by entering the amount as a credit transaction in your journal. A reduction in revenue is done by creating a debit to the revenue account. Sales and donations are examples of revenues.
Changes in Expense Accounts
Expenses are the costs that you incur in operating your business. They are reported on the Income Statement and carry a debit balance in the accounting journal. To show a change in these accounts enter a debit to reflect an increase the balance and credit when payments are made to decrease the balance. Some examples of expenses are advertising, insurance, payroll and rent.
This is a basic introduction to accounting, debits and credits. To learn more about small business accounting and how account balances are shown in financial reports visit www.tbsusa.com.