Master your Debits and Credits
Debits and Credits can be a really challenging concept to grasp when starting off in accounting
They are pretty much a whole new language…and most people think they are too confusing to understand
But they are actually really simple
First..
➡️ What are Debits and Credit?
Debits & Credits are kind of hard to to explain because…well
They aren’t really anything
They are just a way of communicating what is happening to an account in your income statement/balance sheet (i.e. your general ledger)
They are the way you work with what is famously known as “Double Entry Accounting”
➡️ What is Double Entry Accounting?
This pretty much means that everything financially that happens to a business affects at least 2 accounts in your general ledger
That’s right…every single financial transaction…
And those 2 “actions” are communicated via debits & credits
➡️ How can I remember when to use a Debit, and when to use a Credit?
OK…so this is where it can get confusing
But it’s actually really simple if you understand this formula
ASSET = LIABILITIES + OWNERS EQUITY
All financial activity affects one or more of these 3 sections of your balance sheet
and when using debits & credits…
The way Assets go up or down…
is the complete OPPPOSITE for how Liabilities + Owners Equity go up or down:
And this is all you need to memorize 👇
Assets —> ⬆️ go UP with DEBITS ⬇️ Go DOWN with CREDITS
Liabilities + Owners Equity —> ⬆️ Go UP with CREDITS ⬇️ Go DOWN with DEBITS
➡️ What about the Profit and Loss?
The key thing to remember is that Your Profit & Loss flows ⏩ into your Owners equity ⏩ through an account called RETAINED EARNINGS
So your Net Income goes UP ⬆️ with Credits
and DOWN ⬇️with Debits
Than means that any P&L account that’s GOOD for your net income (like Revenue)
Will go up by…..?
That’s right - a CREDIT
And things that are BAD for your net income (like COGS / Expenses)
Will go up by…?
Exactly! A DEBIT
Check out these 20 examples of Debits & Credits to help you grasp the idea.
If you liked this post, you'll also like my course Accounting Made Easy in which I cover in detail the basics to make accounting concepts easier to learn for you.