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Master your Debits and Credits


Debits & Credits can be a real 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

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.


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