Debits and credits in a business are used to record as well as track the changes that arise in the accounting values, according to the double entry concept in bookkeeping (Also see Basic accounting concepts). Credits and debits are mirror opposites. Every debit in an account is written with a credit to a different account and this is how it is named.
You must understand credits and debits in order to analyze the balance sheets and do bookkeeping of your company. For this, you must know how you must record credits and debits correctly in your account books. But, before you do so, you must know what are liabilities, assets, and equity in accounts.
Liabilities are credit accounts, which include notes payable, long-term debts, unearned fees, and accounts payable. Assets are debit accounts, which include accounts receivable, cash, inventory, plants and equipment, prepaid expenses, investments, and office supplies.
And, owner’s equity is a credit account, which includes the capital that is invested by the original investors of the company as well as surplus and retained earnings. Now, you must know how to record credits and debits in accounting.
- First of all, you need to create a balance sheet that should have all the credit accounts on the right side and all the debit accounts on the left side. For instance, a company has $6,500 in trade receivables, $4,800 in bank balance, $1,300 in accruals, and $3,480 in retained earnings. Then, the bank balance and trade receivables will be entered on the left side of the balance sheet under assets and retained earnings and accruals will be entered on the right side of the balance sheet under equity and liabilities respectively.
- Next, you need to create ledgers for each of these accounts. General ledger is a consolidated summary of all recorded credits and debits for all the accounts. In this, you must put the credit entry on the right side and the debit entry on the left side of the balance sheet. Make sure that the credit accounts have credit balances and debit accounts have debit balances.
- When you enter a transaction, you must consider the thing that is exchanged. In every transaction, something is exchanged for some other thing.
- Now, you must calculate the end balance in every account, which will update your company’s balance sheet. You must know that your balance sheet should always be balanced, which is why it is named so. The total value of your liabilities as well as your equity must equal your assets’ value.
This is how you need to record credits and debits in your business. Follow these steps to accurately record your business transactions in your account books. If you are still not confident enough, you may engage an accounting firm in Johor Bahru.