This is one of the most confusing topics in bookkeeping. So many people get hung up on debits and credits. This post will demysfity the terms once and for all. Watch the video below and you'll master this concept.
Debits & Credits Demystified
The Problem with Debits and Credits
Debits and credits are fickle little creatures. Many people believe that a credit will increase an account balance and a debit will reduce it. That's only true some of the time in accounting. For some reason, accountants like to make things harder than they have to be. Don't aske me why.
Going forward, use this graphic below to help out:
How Debits and Credits Work
Assets are listed on your balances sheet. When you debit an asset account, the balance will go up. When you credit an asset account, the balance will go down.
Types of asset accounts include:
- Accounts receivable
- Fixed assets
Liabilities and Equity Accounts:
Liabilities and equity are listed on the balance sheet. When you debit them, their balances go down and when you credit them they go up.
Types of liability accounts include:
- Credit cards
- Accounts payable
Types of equity include:
- Additional paid-in capital
- Owner distributions
- Owner contributions
Revene accounts are listed on your income statement. A revenue account acts just like liabilities and equity when it comes to a debit and a credit. When you debit a revenue account, the balance goes down and when you credit a reveneue account, the balance goes up.
Types of revenue accounts include:
- Sales from services
- Sales from product
Expense accounts are listed on the income statement. They act like assets when it comes to debits and credits. When you debit an expense account the balance goes up. When you credit an expense account, the balance goes down.
Types of expense accounts include:
- Cost of goods sold
I hope this helps you as you work through the debts and credits in your business. It can be a hard concept to master. If it helps, print off the picture above as a reference card when you're making your next journal entry.
Here are some additional links to consider:
Best of luck and happy accounting.