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    Credits and Debits Explained

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    Cristine Jean Dela Cruz
    This document explains debits and credits in accounting transactions. Every transaction has an equal debit and credit. Debits to assets or reductions in liabilities on a balance sheet are good, while debits to expenses on a profit and loss statement are bad. Credits are the opposite. A simple cash sale is recorded with a debit to cash and credit to sales. A sale on credit with VAT adds a debit to debtors and credits to sales and VAT creditor. More complex transactions require determining where one side of the transaction goes to identify where the other side is recorded. Double entry bookkeeping ensures full accounting of all money movements.

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    Credits and Debits Explained

    Uploaded by

    Cristine Jean Dela Cruz
    173 views2 pages
    This document explains debits and credits in accounting transactions. Every transaction has an equal debit and credit. Debits to assets or reductions in liabilities on a balance sheet are good, while debits to expenses on a profit and loss statement are bad. Credits are the opposite. A simple cash sale is recorded with a debit to cash and credit to sales. A sale on credit with VAT adds a debit to debtors and credits to sales and VAT creditor. More complex transactions require determining where one side of the transaction goes to identify where the other side is recorded. Double entry bookkeeping ensures full accounting of all money movements.

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    credits and debits explained

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    This document explains debits and credits in accounting transactions. Every transaction has an equal debit and credit. Debits to assets or reductions in liabilities on a balance sheet are good, while debits to expenses on a profit and loss statement are bad. Credits are the opposite. A simple cash sale is recorded with a debit to cash and credit to sales. A sale on credit with VAT adds a debit to debtors and credits to sales and VAT creditor. More complex transactions require determining where one side of the transaction goes to identify where the other side is recorded. Double entry bookkeeping ensures full accounting of all money movements.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    173 views2 pages

    Credits and Debits Explained

    Uploaded by

    Cristine Jean Dela Cruz
    This document explains debits and credits in accounting transactions. Every transaction has an equal debit and credit. Debits to assets or reductions in liabilities on a balance sheet are good, while debits to expenses on a profit and loss statement are bad. Credits are the opposite. A simple cash sale is recorded with a debit to cash and credit to sales. A sale on credit with VAT adds a debit to debtors and credits to sales and VAT creditor. More complex transactions require determining where one side of the transaction goes to identify where the other side is recorded. Double entry bookkeeping ensures full accounting of all money movements.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Debits and Credits Explained

    Every transaction you make will lead to (at least) two entries in your accounts, a debit and a credit. More
    complex transactions may lead to a larger number of postings, but the total of the debits for that transaction will
    always be equal to the total of the credits.

    Easy way to understand where to put your debits and credits


    A Debit to the balance sheet is good (increasing an asset or reducing a liability)
    A Debit to the profit and loss is bad (increasing an expense or reducing income)
    A Credit to the balance sheet is bad (reducing an asset or increasing a liability)
    A Credit to the profit and loss is good (increasing income or reducing an expense)

    Take The Example Of A Simple Cash Sale


    The two entries are:

    Debit cash on the balance sheet (cash balance has increased)


    Credit sales on the profit & loss (a sale has been made)

    These are both good for the business.

    What About A Sale On Credit, With VAT?


    This simple situation is complicated slightly if the business is VAT registered. Say a sale is made for £100
    excluding VAT with credit terms given to the customer. Here the double entries are:

    £120 Debit to debtors on the balance sheet


    £100 Credit to sales on the profit & loss
    £20 Credit to the VAT creditor on the balance sheet

    Note that although there are three transactions, the total of all the debits and credits still agrees.

    The “T” Account


    This is often shown in a “T” account, where debits are always shown on the left, and credits on the right (if you
    live in the UK this is because you DRive on the left, and CRash on the right (debits and credits are often
    abbreviated to Dr & Cr)

    Again, using the good/bad analysis:

    the customer owes the business £120 (good, DR balance sheet)


    there has been a net sale of £100 (good, CR profit & loss)
    the business owes HMRC £20 (bad, CR balance sheet)

    At a later point the customer will hopefully pay for their purchase. At this point you credit debtors (to remove
    the amount owed) and debit your bank balance. Of course at the end of your VAT quarter part of that cash will
    go to HMRC to clear the VAT creditor.

    More Complex Transactions


    For more complex transactions it is not always easy to tell where the debits and credits will go. Typically if you
    can work out where one side goes, and you know whether it is a debit or a credit (use the patronising but useful
    good/bad system above!), you can then figure out where the other side will end up.

    But What’s The Point?


    If double entry bookkeeping is done properly, you’ll know where every penny comes from and goes. Every
    single transaction will be explained properly, and there won’t be any “unknown differences” written off. Of
    course, this is in an ideal world, and is based on everything always being posted to the correct place.

    The combination of all the various debits and credits to date can be summed up in the trial balance. This shows
    all the different balance sheet and profit and loss items in a big list with the debit or credit balance of each one.
    Of course, when you sum all the credits together, and all the debits together, the total of each column will be the
    same. If not you’ve got a real problem!

    Banks
    By now you should know that having a positive balance in your current account will be a debit (a positive
    balance is a good thing!). Increasing that balance would be a debit, and decreasing it would be a credit.

    So why when you look at your bank statement is it the wrong way around?

    It isn’t…for the bank. The bank produces the statements from their point of view. If you have a positive bank
    balance, that means the bank owes you money, so to them it is a credit.

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