It is important for all small business owners to understand the basics of how debits and credits work in accounting. This gives them a clear understanding of how the money moves in and out of their accounts and a better understanding your financial standing as a business. Propel Your Accounting is here to talk about credits and debits in accounting so that we can help small business owners know the way these numbers work.
Debits & Credits in Accounting Terms
A big part of your business is going to be your record keeping with your small business accounting books. As you record all of the transactions that have to do with doing business, credits and debits come into play. Credits and debits represent opposite but equal entries into your books. Here is a closer look at what a credit and a debit is.
– Debit: When a debit is entered into an accounting record, it is an entry that records incoming cash. This will work to increase asset and expense accounts and will decrease liability, equity and revenue accounts.
– Credit: This is a record of cash that is outgoing rather than incoming. It will increase liability, revenue and equity and will decrease asset and expense accounts.
How Credits & Debits are Implemented in Accounting
Credits and debits will have an opposite impact on certain accounts. It’s important that you understand what these accounts are and how they are affected by credits and debits.
– Asset: This is a representation of what the company owns including cash, property, inventory and so on. Debits will increase asset accounts while credits will decrease them.
– Liability: The liability account will represent what the company owes whether it is credit card balances, loans or accounts payable. Debit will decrease liability accounts because payments have been made and what the company owes is reduced. Credits will increase this account because it shows the company owes more.
– Equity: Equity accounts will represent the stakeholder’s claim on the company and its assets. Also, encompassing stocks, retained earnings and capital are included in this account. Debits will decrease an equity account as it shows withdrawals, losses and dividends. Credits will increase the equity accounts as mirror the profits and value from investors.
– Revenue: This captures the inflow of cash from investing, sales and operating costs. Credits will increase revenue accounts as it shows the earnings and income generated. Debits will decrease this account as it shows deductions from the total income.
– Expense: This is the actual cost of running a business. Included in this would be salaries, rent, marketing and so on. Debits increase expense accounts as this reflects the consumption of funds. Credits will decrease expense accounts showing adjustments or reversals of previously recorded expenses.
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Keeping all of this information straight can be difficult for small business owners. This is why they turn to Propel Your Accounting to do it for them. Call us today!
