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Understanding Debits and Credits in Bookkeeping

Even the smallest business needs a strong bookkeeping base. Whether owners are doing their bookkeeping on their own or hiring a professional to take care of that job, it’s important for those who run businesses to understand the basic principles of small-business bookkeeping. One of the first concepts to understand is debits and credits.

Here’s what you should know about debits and credits in small-business bookkeeping:

  1. What is a debit? A debit is money flowing into the business. Think about personal finances. Using a debit card means you have the money in the bank. In business bookkeeping, a debit is when the business is receiving cash or assets. Debits will increase assets and expenses but decrease liability, equity and revenue. Debits are always recorded on the right hand column in bookkeeping.

  2. What is a credit? Conversely, a credit is money flowing out of the business. Going back to personal finances, credit is money you’re using but don’t have. In business accounting, credits are expenditures or anytime money leaves. Credits decrease assets and expenses, but increase liability, equity and revenue. Credits are always recorded on the left hand column in bookkeeping.

  3. What is a double-entry system? Most businesses use a double-entry system for their bookkeeping, but not everyone knows what that means. The business account is divided into smaller ‘buckets’ that need to all balance out. If there’s something taken out of one bucket, it needs to go somewhere else.

  4. How do debits and credits work together? In a double-entry system, each transaction has a balancing transaction. So for each debit, there needs to be a credit and vice versa. This is truly the definition of ‘balancing the books.’

Debits and credits are one of the basic principles in double-entry bookkeeping and accounting. The principle of money coming in having to come out of another part of the account can get complicated as the business grows. Talk to Raleigh Bookkeeping for your bookkeeping needs.

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