Credits and Debits

One of the basic principles of bookkeeping is Credits and Debits often not fully understood by bookkeepers (almost never understood by clients).

Most people think for instance if you pay money into a bank account it’s a credit (in terms of your bank account that is true but for accounting purposes paying money into a bank account is actually a debit), let me explain this in a bit more detail.

When you pay money into your bank the bank effectively owes you that amount of money and therefore you become a liability to the bank as you can see from the table below a liability is a credit so the bank will say you have credited the account.

However from a bookkeeping prospective paying money into a bank account is an asset of your business (or your clients business) and, therefore, is a debit in respect of your business (or clients business).

The following table may help.

I found the easiest way to remember it was using the letters DEAD CLIC.

 

 


There may be a few terms in the above table you are not familiar with so I will detail them below with an explanation.

We will touch on all these later in the course

An asset is something of value owned by the business and is split into 2 sections Fixed Assets which generally would be items expected to last over a year (i.e. Motor Vehicles, Plant and Machinery, Fixtures and Fittings, Property) and

Current assets which are things such as cash in the bank, petty cash, Debtors (people who owe the company money, normally customers) and stock in hand.

A Liability is a debt owed by the business Bank Overdraft, Credit Cards, Loans, Creditors (someone owed money by the company for instance suppliers who haven’t been paid for goods or services provided).

Drawings are the sole trader or partners wages this is not part of Limited Company accounts that will be explained in a later module.

Capital Introduced is money put into the business by sole trader or partners this is not part of Limited Company accounts that will be explained in a later module.

You must really get to terms with the table above but don’t worry at this stage we will be going back to it on several occasions throughout the course. When I first learned bookkeeping it was the single most useful thing I was taught.

I’ve also put a flowchart below to again help you understand this issue. Some of you will prefer the flowchart while some may prefer the table above. Either will give you the skills and information you need

 

Double Entry Bookkeeping

Double entry bookkeeping is what all computer bookkeeping software uses and bookkeeping using these software packages cannot be completed correctly without understanding it.

In simple terms for every Credit there is an equal Debit (or combination of debits).

The illustrations below may help

 


Here we have a balanced scale with no weight on either end

What happens if we put a debit on our scale on one side?

 

As we can see the scale overbalances to the left we now need a credit of the same size

Or a combination of 2 or more credits that match the size of our debit

 

Likewise, if we have a credit and no debit

So we need a matching debit


Or a combination of 2 or more debits that match our credit

So how do I enter these transactions?

The entries (if completing bookkeeping manually) are recorded on, what are commonly described as T accounts and as you have learned every debit has a corresponding credit (or combination of credits) and every credit has a corresponding debit or combination of debits

 

You will see how it works with a combination of Credits to balance a debit (and vice versa) when we look at the bookkeeping for VAT registered clients.

 

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