Uncertain of where to begin? Not sure the difference between a debt and a credit? We’ve got you covered on the basics of basics when it comes to bookkeeping, and understanding your debits and credits.
First, throw out the traditional definition of debits and credits. No, a debit isn’t a deduction, and a credit is not an increase. They’re the names of the columns on your bookkeeping ledger (99% of the time, debit is on the left, with credit to the right).
In bookkeeping, or double entry accounting specifically, the total of each column must equal the other. Basically, the total of all of the debits has to equal the total of the credits – ensuring this equality; you can eliminate any basic arithmetic error.
When making an entry, a bookkeeper makes an entry into the credit side of the ledger as well as on the debit side. Everything is in the positives (No negative numbers here).
But what goes where, you ask? Basically, the accounts that are your money increase with debits, and decrease with credits. Every other account increased with credits, and decreased with debits. It’s a bit confusing, but as soon as you will start to do bookkeeping transaction as faster and better you will understand those terms.
So… what are ‘your money’ accounts, anyway? They’re the actual money, expense, and equipment and inventory that you have right now. Any assets are with this, as well as cash, and assorted expenses you’ve incurred.
Let’s try a simple example, shall we? You open your own business with $20,000. Your very first bookkeeping entries would be to debit the account ‘Checking Account’, and credit the account for paid in capital.
Now, you’ve made a sale. Let’s say… $300. Not bad, for your first sale. You were paid in cash, which you obviously deposited in the business checking account. If you didn’t, there’s another issue entirely we should discuss. Your bookkeeping entries for the day would be to credit the Sales with $300, and to debit the checking account with $300.
Now, it’s the end of your very first month in business, time to pay the gas bill. In the bookkeeping ledger, you would debit the expense account for the bill, and credit the checking account. Get it?
Okay, probably not. Bookkeeping isn’t easy to get on first try, so don’t feel bad if you’re a bit lost. Take a look at your bookkeeping ledger closely to understand how it works, and remembers the basic principles – debits increase, credits decrease, when we’re dealing with expenses, assets, and your money. If you remember that, you’re on your way. The more you do it, the easier it will be!