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The Importance of Debits and Credits

The Importance of Debits and Credits

The correct use of debits and credits is extremely important when dealing with basic accounting practices. If your knowledge and ability to implement these items is decent it will be a great way to further yourself in the field of accounting. Thus, in turn if you do not have a good grasp on what these concepts are, you will have a very hard time advancing through a career as an accountant. So, as you can see the use of the techniques is very important so that is why 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 booking keeping terms for accounts as each account we deal has both a debit side and 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 separate it allows the accounts to be added up and kept in neat order. The main use of the debits and credits is for changing an account balance. To know what side of the account to put the recent activity is very important, so you have to memorize which side increases and which decreases to keep your books up to date. It is also important for you to know debits and credits so you can be quick and efficient as well as up to date with your bookkeeping so you can also keep the business or your work in line.

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 put on the debit side in the general journal. Whereas if spend cash to buy something you will say credit the cash account because that reduces the total amount in the account. It is very important to keep up to date with the accounts and increase and decrease the totals on the correct side of the column so you All assets accounts increase their total on the debit side and in turn decrease on the credit side. Assets accounts include cash; accounts receivable, land, or any item of economic value owned by an individual or corporation, especially that which could be converted to cash. For 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 Revenue, and Notes Payable, the actual definition is a debt assumed by a business entity as a result of its borrowing activities or other fiscal obligations. The last part of the balance sheet equation is 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; it includes the accounts of Capital and Drawing (also known as the personal account, money used for personal reasons). The owner’s equity also includes the Income Statement which houses all the revenue and expenses accounts. The revenues increase on the credit side, and decrease on the debit side. The expense accounts are the opposite of the revenue accounts they are added to using the debit side and are taken from on the credit side of the account. For an example of the use of debit and credit bookkeeping, let’s just say you borrow cash on a loan from the local bank. To record it in your books, you would increase the cash on the debit side because you are adding to the total, and also add to the credit side of loan payable as a liability. When you do something to a debit you need to do something with a credit account as well. That is why when you added to the debit for cash you also had to do something with a credit which is why you add a loan under liabilities. That was a very basic example, but it shows you the way debits and credit bookkeeping are used in early accounting journals.

As you have read the use debits and credits are very important as a basic accounting principle. Using debits and credits in the correct way is the most basic form of bookkeeping in accounting without them you are cannot do much else. You need to have knowledge of these before everything else you do in accounting without them you can’t do really any other form of bookkeeping within the accounting field. I hope this article has helped you with the basic use of debit and credit bookkeeping.

By: Bill McDougall