What are Debits and Credits?
Debits and credits are the fundamental building blocks of double-entry bookkeeping. A debit entry increases asset or expense accounts, while a credit entry increases liability, equity, or revenue accounts.
Example of Debits and Credits
If a company purchases office supplies for $500, it would debit the office supplies account and credit the cash account.
How To Calculate Debits and Credits
Every financial transaction affects at least two accounts. Use the accounting equation (Assets = Liabilities + Equity) to ensure transactions are balanced.
- Special Tip Always ensure that the total debits equal the total credits for every transaction to maintain balanced books.
- Advantages
- Provides a clear and accurate financial picture.
- Helps in detecting and preventing errors.
- Essential for preparing financial statements.
- Disadvantages
- Can be complex and time-consuming.
- Requires thorough understanding and accuracy.
FAQs
What is the difference between a debit and a credit?
A debit increases assets or expenses, while a credit increases liabilities, equity, or revenues.
Can an account have both debits and credits?
Yes, most accounts will have both, but the balance will be either a debit or a credit.
Why are debits and credits important in accounting?
They ensure the accuracy and integrity of financial records.
How do debits and credits affect the balance sheet?
They affect the values of assets, liabilities, and equity, ensuring the accounting equation stays balanced.
