DEBITS & CREDITS...WHY SO CONFUSING???
Debits and credits can be confusing, especially to business owners and bookkeeping staff who do not have a formal background in accounting. Debits and credits are fundamental elements of “double-entry” bookkeeping and exist within every accounting system. In an effort to make the accounting experience easier and more intuitive, platforms such as QuickBooks Online mask elements of the double-entry function behind their modules. For example: When someone writes a check in QuickBooks, the system automatically splits the entry and applies the debit to the expense account and the credit to the bank. The user does not even have to think about it! This automatic splitting function is built into the check, bill, and invoicing processes within the software. This simplifies the experience for the user. However, since the double-entry function is a fundamental aspect of accounting, it continues to reside in the background. It is usually only when the user has to make an adjustment that they need to recall the debits and credits rules.
If you find yourself needing to make adjustments, you may find the information below helpful.
Here are a few basics:
On an accounting adjustment (journal entry), debits are on the left side and credits are on the right.
Accounts that are INCREASED with a debit and DECREASED with a credit = Asset and Expense accounts (Tip to remembering if an expense is a debit or credit: You use your “debit card” when you buy something for your business. You are increasing the expense that you are accumulating for your company when you buy something and therefore the expense is a debit. The bank account is correspondingly credited.)
Accounts that are INCREASED with a credit and DECREASED with a debit = Revenue, Liability, and Equity accounts
You must have both a debit and a credit for the journal entry to balance. You cannot have one without the other. For example:
When you write a check for an office expense, you will debit (or increase) the amount in the office expense account, and credit (or decrease) funds in the checking account.
Similarly, if you deposit funds into the bank, you will debit (or increase) the checking account, and credit (or increase) the sales revenue account (or decrease) the accounts receivable account.
It’s a good idea to memorize notes 2 and 3 above, so that when you go to make an accounting adjustment or journal entry, you can easily figure out which account should be debited, and which should be credited.
If you want help with your accounting adjustments or would like help training your staff on accounting processes, please contact us today!
By: Heather D. Richard