A
VI
U
ST
, AccountingCoach.com
Debits & Credits
Introduction to Debits & Credits
If the words "debits" and "credits" sound like a foreign language to you, you are more
perceptive than you realize—"debits" and "credits" are words that have been traced
back five hundred years to a document describing today's double entry accounting
system.
ST
Under the double entry system every business transaction is recorded in at least two
accounts. One account will receive a "debit" entry, meaning the amount will be entered
on the left side of that account. Another account will receive a "credit" entry, meaning
the amount will be entered on the right side of that account. The initial challenge with
double entry is to know which account should be debited and which account should be
U
credited.
Before we explain and illustrate the debits and credits in accounting and bookkeeping,
VI
we will discuss the accounts in which the debits and credits will be entered or posted.
A
What Is An Account?
To keep a company's financial data organized, accountants developed a system that
sorts transactions into records called accounts. When a company's accounting system
is set up, the accounts most likely to be affected by the company's transactions are
identified and listed out. This list is referred to as the company's chart of accounts.
Depending on the size of a company and the complexity of its business operations, the
chart of accounts may list as few as thirty accounts or as many as thousands. A
company has the flexibility of tailoring its chart of accounts to best meet its needs.
Within the chart of accounts the balance sheet accounts are listed first, followed by the
income statement accounts. In other words, the accounts are organized in the chart of
accounts as follows:
For personal use by the original purchaser only. Copyright © 2009 AccountingCoach.com. 1
, Assets
Liabilities
Owner's (Stockholders') Equity
Revenues or Income
Expenses
Gains
Losses
Double Entry Accounting
Because every business transaction affects at least two accounts, our accounting
system is known as a double entry system. (You can refer to the company's chart of
accounts to select the proper accounts. Accounts may be added to the chart of
accounts when an appropriate account cannot be found.)
ST
For example, when a company borrows $1,000 from a bank, the transaction will affect
the company's Cash account and the company's Notes Payable account. When the
company repays the bank loan, the Cash account and the Notes Payable account are
also involved.
U
If a company buys supplies for cash, its Supplies account and its Cash account will be
affected. If the company buys supplies on credit, the accounts involved are Supplies
and Accounts Payable.
VI
If a company pays the rent for the current month, Rent Expense and Cash are the two
accounts involved. If a company provides a service and gives the client 30 days in
which to pay, the company's Service Revenues account and Accounts Receivable are
A
affected.
Although the system is referred to as double entry, a transaction may involve more than
two accounts. An example of a transaction that involves three accounts is a company's
loan payment to its bank of $300. This transaction will involve the following accounts:
Cash, Notes Payable, and Interest Expense.
(If you use accounting software you may not actually see that two or more accounts are
being affected due to the user-friendly nature of the software. For example, let's say that
you write a company check by means of your accounting software. Your software
automatically reduces your Cash account and prompts you only for the other accounts
affected.)
For personal use by the original purchaser only. Copyright © 2009 AccountingCoach.com. 2
VI
U
ST
, AccountingCoach.com
Debits & Credits
Introduction to Debits & Credits
If the words "debits" and "credits" sound like a foreign language to you, you are more
perceptive than you realize—"debits" and "credits" are words that have been traced
back five hundred years to a document describing today's double entry accounting
system.
ST
Under the double entry system every business transaction is recorded in at least two
accounts. One account will receive a "debit" entry, meaning the amount will be entered
on the left side of that account. Another account will receive a "credit" entry, meaning
the amount will be entered on the right side of that account. The initial challenge with
double entry is to know which account should be debited and which account should be
U
credited.
Before we explain and illustrate the debits and credits in accounting and bookkeeping,
VI
we will discuss the accounts in which the debits and credits will be entered or posted.
A
What Is An Account?
To keep a company's financial data organized, accountants developed a system that
sorts transactions into records called accounts. When a company's accounting system
is set up, the accounts most likely to be affected by the company's transactions are
identified and listed out. This list is referred to as the company's chart of accounts.
Depending on the size of a company and the complexity of its business operations, the
chart of accounts may list as few as thirty accounts or as many as thousands. A
company has the flexibility of tailoring its chart of accounts to best meet its needs.
Within the chart of accounts the balance sheet accounts are listed first, followed by the
income statement accounts. In other words, the accounts are organized in the chart of
accounts as follows:
For personal use by the original purchaser only. Copyright © 2009 AccountingCoach.com. 1
, Assets
Liabilities
Owner's (Stockholders') Equity
Revenues or Income
Expenses
Gains
Losses
Double Entry Accounting
Because every business transaction affects at least two accounts, our accounting
system is known as a double entry system. (You can refer to the company's chart of
accounts to select the proper accounts. Accounts may be added to the chart of
accounts when an appropriate account cannot be found.)
ST
For example, when a company borrows $1,000 from a bank, the transaction will affect
the company's Cash account and the company's Notes Payable account. When the
company repays the bank loan, the Cash account and the Notes Payable account are
also involved.
U
If a company buys supplies for cash, its Supplies account and its Cash account will be
affected. If the company buys supplies on credit, the accounts involved are Supplies
and Accounts Payable.
VI
If a company pays the rent for the current month, Rent Expense and Cash are the two
accounts involved. If a company provides a service and gives the client 30 days in
which to pay, the company's Service Revenues account and Accounts Receivable are
A
affected.
Although the system is referred to as double entry, a transaction may involve more than
two accounts. An example of a transaction that involves three accounts is a company's
loan payment to its bank of $300. This transaction will involve the following accounts:
Cash, Notes Payable, and Interest Expense.
(If you use accounting software you may not actually see that two or more accounts are
being affected due to the user-friendly nature of the software. For example, let's say that
you write a company check by means of your accounting software. Your software
automatically reduces your Cash account and prompts you only for the other accounts
affected.)
For personal use by the original purchaser only. Copyright © 2009 AccountingCoach.com. 2
