Accounting – Explanation of debits and credits

When you considered becoming your own boss, you probably didn’t think you would be learning a whole new language just by doing it. But accounting terms are some of the things that most business owners will need to get used to.

Two of the most common accounting terms, debits and credits, are explained below to help you understand how they work in business.

Changes in asset accounts

The things your company owns in business, such as cash, cash equivalents, furniture, equipment, machinery, and land, are assets. It lists each account category and continues to calculate your balance totals so you can report them on the Balance. Assets have a debit balance. To record an increase in this account, enter the amount as a debit in your journal. A corresponding credit is entered to show a decrease in the balance of an asset.

Changes in liability accounts

The total outstanding debt that a company owes to its suppliers is called a liability. These are debts that can be categorized as short or long term. To show an increase in liabilities, enter a credit in your journal. As payments are made to decrease the balance, you can demonstrate this by entering a debit to the liability account.

Changes in equity accounts

Equity is the value of your business to its owners and stakeholders. Capital accounts have a credit limit. When you reinvest the earnings or inject additional funds from the owners, the account is augmented with a credit entry on its books. To reduce the balance, post a debit to the capital account.

Changes in income accounts

All sources of income that your business earns or receives are considered Income. These accounts have a credit limit and are increased by entering the amount as a credit transaction in your journal. The reduction of income is done by creating a debit to the income account. Sales and donations are examples of income.

Changes in expense accounts

Expenses are the costs you incur in operating your business. They are reported in the income statement and have a debit balance in the accounting journal. To show a change in these accounts, enter a debit to reflect an increase in the balance and a credit when payments are made to decrease the balance. Some examples of expenses are advertising, insurance, payroll, and rent.

This is a basic introduction to accounting, debits and credits. For more information on small business accounting and how account balances are displayed in financial reports, visit www.tbsusa.com.