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Understanding Debits and Credits in Accounting

Debits and Credits

Welcome back to our series, “Accounting for the Non-Accountant,” where we simplify essential accounting concepts for beginners. Today, we’re diving into the core principles of debits and credits – the backbone of accounting. Let’s break it down.

 

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Demystifying Debits and Credits

At its core, accounting is simply a system of recording, analyzing, and interpreting financial transactions. Debits and credits are the basic building blocks of this language, used to document the flow of money within accounts. Contrary to common misconception, debits and credits are not inherently good or bad – they’re merely entries that represent the movement of financial assets. 

The Basics

In accounting, every transaction affects at least two accounts, and each account is impacted by either a debit or a credit. The key to understanding debits and credits lies in knowing which accounts increase or decrease with each entry.

Debits

  • Debits are entries made on the left side of an account.
  • They increase certain types of accounts, such as assets and expenses, while decreasing others, like liabilities and equity.
  • Think of debits as the action of incurring expenses.

Credits

  • Credits are entries made on the right side of an account.
  • They increase different types of accounts, such as liabilities and equity, while decreasing others, like assets and expenses.
  • Think of credits as the action of receiving money or reducing debt.

Applying Debits and Credits in Transactions

Now, let’s see how debits and credits work in practice with a couple of examples:

Cash Purchase:

  • When a company purchases inventory with cash, the cash account is debited to reflect the outflow of cash. This decreases the company’s cash holdings.
  • Simultaneously, the inventory account is credited to represent the acquisition of assets. This increases the company’s inventory holdings.

Sales Revenue:

  • When a company makes a sale on credit, the accounts receivable account is debited to record the increase in assets. This represents the amount owed to the company by its customers.
  • Conversely, the sales revenue account is credited to reflect the revenue earned from the sale. This increases the company’s income.

In summary, debits and credits are the language of accounting, used to record the flow of money within accounts. By understanding these concepts, you’ll be better equipped to navigate financial transactions and interpret financial statements. Stay tuned as we continue our journey through the world of accounting for the non-accountant!

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We understand that every business is different, and we will work with you to create a customized solution that meets your specific needs. Contact us today to learn more about how we can help your business save money through outsourcing.

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REQUEST ONLINE PRESENTATION

We’ll demonstrate how you can save money while improving your efficiency and accuracy when you outsource your back office services to TEAM LUXA.
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LUXA Enterprises download brochure

Call TEAM LUXA today at (918) 928-7288 to learn more about why outsourcing is right for you!

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