The Double Entry Method Of Book Keeping And How To Know If It s A Debit Or A Credit
Below is a MRR and PLR article in category Finance -> subcategory Debt Consolidation.
Understanding the Double Entry Method in Bookkeeping: Clarifying Debits and Credits
I remember being baffled by this concept in high school. It takes some contemplation, but eventually, the light bulb turns on for those of us who aren’t accountants. This article will explain the basic principles of the double entry bookkeeping method and clarify how to determine if something is a debit or a credit. Hopefully, this will clear things up for many of you.
Key Concepts
Debits and credits are fundamental to accounting. Today, the double entry bookkeeping method is used worldwide. This system ensures that for every account debited by a certain amount, another account is credited by the same amount. Therefore, the total of all debits must always equal the total of all credits.
Understanding which account to debit or credit in any transaction comes down to some core principles.
Rules for Debits and Credits
1. Asset Accounts (Real Accounts):
- Debit: What comes in.
- Credit: What goes out.
- Examples: Cash, machinery, land.
2. Income/Expense Accounts (Nominal Accounts):
- Debit: All expenses and losses.
- Credit: All income and gains.
- Examples: Salary, purchases, sales.
3. Personal Accounts:
- Debit: The receiver.
- Credit: The giver.
- Examples: Individual accounts like Mr. Johnson’s or Forsyth Inc.
Practical Examples
- Buying Furniture: If you purchase furniture worth $1,000 with cash, apply Rule 1. Debit the furniture account and credit the cash account.
- Paying Salary: If a business pays $1,500 in salary to Mr. Smith by cheque, apply Rule 2. Debit the salary account and credit the bank account (since banks are treated as personal accounts).
Trial Balance
At the end of a period, all account balances are displayed in a trial balance. Debit balances go on the left, credit balances on the right. Because every debit has a corresponding credit, both sides of the trial balance should match. If they don’t, there’s likely an entry error.
Bank Accounts: A Common Confusion
Bankers might use debit and credit differently, leading to confusion. When your bank balance increases from a deposit, the bank credits your account. When you withdraw, they debit it. For your business, it’s the opposite: deposit funds mean you debit the bank account, while withdrawals are credited. So, the bank’s statement will have mirrored entries to your records but on opposite sides.
Pro Tip: When your accountant tells you that your bank book has been debited by $1,000, it means a deposit, not a payment?"so it’s good news!
By understanding these foundational elements, you’ll have a clearer grasp of accounting and how to manage your financial records effectively.
You can find the original non-AI version of this article here: The Double Entry Method Of Book Keeping And How To Know If It s A Debit Or A Credit.
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