1.06 – Differentiating Debits & Credits
In bookkeeping, debits and credits function differently from what you might be accustomed to. It can initially be confusing to determine whether a debit or credit will increase or decrease an account. However, with regular practice, this will soon become second nature. To simplify this, Table 1-1 provides a helpful chart used by bookkeepers and accountants alike.
How Credits and Debits Impact Your Accounts
Account Type | Debits | Credits |
Assets | Increase | Decrease |
Liabilities | Decrease | Increase |
Income | Decrease | Increase |
Expenses | Increase | Decrease |
Refer to Table 1-1 and keep it handy as you start maintaining your books. This chart will assist in keeping your debits and credits organized.
Additional Insights on Debits and Credits
Understanding the context of debits and credits in various account types is crucial for accurate bookkeeping. Here’s a more detailed look:
- Assets: Debits increase asset accounts, meaning when you receive cash, equipment, or other valuable items, the asset account is debited. Credits decrease asset accounts when you use up or dispose of these assets.
- Liabilities: Debits decrease liabilities, such as when you pay off a loan. Conversely, credits increase liabilities, like when you take on new debt.
- Income: Income accounts see an increase with credits. For example, sales revenue is recorded as a credit. Debits decrease income, typically when correcting an overstatement.
- Expenses: Debits increase expense accounts, reflecting costs incurred by the business, such as rent or utilities. Credits decrease expense accounts, which may occur when expenses are refunded or overstatements are corrected.
Practical Application
To reinforce your understanding, here are a few practical scenarios:
- Purchasing Inventory: When you buy inventory for $2,000 on credit, you would debit the Inventory account (increase asset) and credit Accounts Payable (increase liability).
- Receiving Cash from Sales: If you receive $500 from a sale, you debit the Cash account (increase asset) and credit the Sales Revenue account (increase income).
- Paying an Expense: Paying $300 for utilities involves debiting the Utilities Expense account (increase expense) and crediting the Cash account (decrease asset).
These examples highlight how debits and credits work together to ensure your books remain balanced. By regularly referring to the chart and practicing these entries, you’ll quickly become proficient in differentiating debits and credits.
