Welcome to the exciting world of debits and credits! What are debits and credits exactly? I can sense that you are on the edge of your seat right now in anticipation, eagerly waiting to read about such an exciting topic… am I right?
Yes, I get it, snooze fest, but it is super important to understand whether you are a business owner wanting to better understand the bookkeeping part of your business… as you should! Or, you are looking to grasp the actual bookkeeping part of it because, you will be using this simple concept constantly.
Basically what you will be doing is simplifying your (or your clients accounts) with a more efficient way to record and classify all the transactions.
What Are Debits And Credits Exactly?
This can be summed up by the following definition:
- A simple way to record and give details of the increases and decreases of the balances of assets, liabilities, equity, income and expenses. A more simple definition would be to say, a way to summarize or a way to keep score.
It is possible that right now you have a blank stare on your face like, what in the world are you talking about? Keep in mind, that as a bookkeeper you will have software that will do this for you but it is important to understand the concept to be able to classify the different transactions. Don’t fret my friend, further explanation is on its way!
The Spigot Example
Check out the image to the right. What you see is a spigot with a drop coming out of it with a woman holding a bucket. The spigot is the business itself and the drop coming out of it is all the different transactions that take place with that business.
The woman is you, the bookkeeper, and the bucket represents the assets, liabilities, equity, income and expenses. You simply have to figure out which bucket to use. This simply makes for a nice visual to get a basic understanding of what you will be doing as a bookkeeper.
The T Account
The T account gives you a little better visualization on how you will be classifying the different types of transactions. The top of the visual represents the checking account of the client or business. To the left of the T is where you will be recording all the debits and to the right of the T, all the credits.
- Debited = The act of putting a debit into an account
- Credited = The act of putting a credit into an account
Using the T account method is going to be your main training tool into the world of double entry accounting. The main purpose of using this method is to help teach you bookkeeping (accounting) because it represents a presentation of the flow of transactions through all the different accounts. Using these will also help to clarify more difficult transactions that you will come across as a bookkeeper.
T accounts also work similar to the accounting equation in the fact that every transaction is going to have 1 credit and 1 debit. So if you are to record a $5,000 debit on the left side of one T, or have to enter a $5,000 credit on the right side of another T.
Once you gain a basic understanding on exactly how T accounts work and how to use them you will fully understand the concept od debits and credits as well. They make for an excellent teaching tool as well as provide you with a visualization to see the flow of transaction from your clients business.
That Was Fun Wasn’t It?
When you are dealing with bookkeeping or accounting, that in a nutshell, is a basic understanding on what debits and credits are and how they work. If you are new to the world of bookkeeping then these concepts may still not make much sense to you and that is fine, and normal.
Check out the picture to the right to help further explain how to classify transactions. It shows you the account type, whether it’s an increase or decrease and debit or credit. This chart will help you to plug numbers into your T account to help provide you with a visual as to your clients transactions.
My purpose is simple to provide you with the information so that you can, at the very least, begin to gain a basic understanding on what a bookkeeper does on a day to day basis. These days there is software that performs these tasks for them but using these illustrations (T accounts) shows the bookkeeper how and where to enter the transactions.
This Seems Complicated
More than likely, this is a practice that you probably have never used before. So for me to say that you should completely have a firm grasp on the concept of debits and credits is foolish. Just like anything else that is new to you, it takes leaning a new skill and practicing it over and over again. Then, before long, it becomes second nature to you and you are doing debits and credits with your eyes closed.
You have either landed on this post because you are a business owner trying to gain an understanding on how to keep your books, a bookkeeper looking for a little clarity or maybe even someone looking to learn bookkeeping and you may be curious as to what you would be doing.
If it’s the last one, then allow me to provide you with a little more clarity. There is now a way to not only learn bookkeeping from home but actually start you own bookkeeping business. Within the course, you will get that details explanation on debits and credits along with everything else in the world of bookkeeping.
Even if you are just a tiny bit curious I want you to do yourself a favor and check out my top rated online bookkeeping course. No need to worry about making any commitments or being suckered into something that isn’t for you. In fact, just the opposite it true.
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Thanks for checking things out and if you have anything to add or any questions you may still have, please drop a comment below and I will be sure to get back to you!