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Accounting

Accounting 101 - The basics

Accounting 101

Double-entry accounting is a bookkeeping system where every financial transaction is recorded in two accounts: one as a debit entry and another as a credit entry. The core idea is that for every transaction, the total debits must always equal the total credits.

In simple terms:

Debit: Money flowing into an account, or what you receive.

Credit: Money flowing out of an account, or what you give.


For example:

If you buy office equipment worth $500 in cash:

• You record a debit entry of $500 in your Equipment account (because you now have more equipment).

• You record a credit entry of $500 in your Cash account (because cash has decreased).

Both sides match ($500 debit = $500 credit), keeping the books balanced.

This method helps prevent errors, makes financial statements accurate, and clearly shows how money moves through your business.

Hang on a secon, I thought when you credit an account you add money to it not decrease it? What's going on?

That’s a common source of confusion—let’s clarify it clearly:

In double-entry accounting, the words debit and credit don’t simply mean “add” or “subtract.” Instead, they reflect different meanings depending on the type of account involved. Let’s simplify this:

Accounts are divided into categories:

1. Asset Accounts

(Things your business owns, e.g., cash, inventory, equipment)

Debit (+) means the asset increases

Credit (–) means the asset decreases

Example: If your cash account receives money, you debit the cash account (increase). If you pay money out, you creditit (decrease).

2. Liability Accounts

(Money your business owes, e.g., loans, accounts payable)

Debit (–) means liabilities decrease

Credit (+) means liabilities increase

Example: Taking out a loan means your debt goes up, so you credit your liabilities. Paying off the loan reduces debt, so you debit liabilities.

3. Equity Accounts

(Owner’s claim in the business)

Debit (–) means equity decreases

Credit (+) means equity increases

Example: Owner investing more money into the business means equity increases, so you credit equity.

4. Revenue (Income) Accounts

(Money earned by your business, e.g., sales income)

Debit (–) means revenue decreases

Credit (+) means revenue increases

Example: You make a sale, revenue increases, so you credit your revenue account.

5. Expense Accounts

(Money spent on running your business, e.g., salaries, rent, supplies)

Debit (+) means expenses increase

Credit (–) means expenses decrease

Example: Paying rent increases your expenses, so you debit the expense account.

Why the confusion?

People commonly misunderstand because most are used to their bank statements, where a “credit” is money coming into their account. But a bank statement shows your account from the bank’s perspective, not yours.

From the bank’s viewpoint:

• Your bank account is a liability (the bank owes you money). Thus, when the bank credits your account, it’s increasing its liability (it owes you more).

• When you deposit money, the bank credits your account because from their side, they now owe you more.

From your viewpoint (your bookkeeping):

• Your bank account is an asset (you own the money).

• So, when your cash increases, you debit it in your books.

Quick memory trick:

Debit (Dr) usually means:

• Increase in Assets or Expenses (A, E)

• Decrease in Liabilities, Equity, Revenue (L, E, R)

Credit (Cr) usually means:

• Increase in Liabilities, Equity, Revenue (L, E, R)

• Decrease in Assets or Expenses (A, E)

Summary:

A “credit” doesn’t always mean adding or subtracting money. It depends on the type of account. The key is to remember that every entry always balances out: total debits = total credits.

How to:
No How To's available
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