Credit vs Debit: What does it mean in accounting?

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Tracking the movement of money in and out of your business, though not always the most exciting, is an essential task for any business owner. This action is known as balancing a business’s books. These entries, which appear on a company’s financial statement, are known as debits and credits. But what exactly is a debit and credit, and what is the difference between them?

Accounts:

To understand how debits and credits work, you need to understand accounts. Every financial transaction affecting a business is recorded in accounts. The five main types of accounts are: assets, expense, revenue, liabilities, and equity.

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????????????-Assets are items that provide future economic benefits to a company. This can be things like cash, accounts receivable, inventory, and equipment

????????????-Liabilities are obligations that the company is required to pay. These are things like accounts payable, loans payable and payroll taxes

????????????-Equity is the money or property that could be returned to shareholders if all the company’s assets were liquidated, and all of its debts were paid off

????????????-Revenue is income earned from the sale of products and services

????????????-Expenses are the costs of operations that a business incurs to generate revenues. These are things like marketing, rent and wages.

Credit:

A credit entry increases liability, revenue, or equity accounts. Inversely, it also decreases an asset or expense account. A credit indicates money leaving an account. Credits are recorded on the right-hand side to mark outgoing money.

Debit:

A debit entry increases an asset or expense account. Inversely, it also decreases a liability or equity account. A debit indicates money coming into an account. Debits are recorded on the left to mark incoming money. The debit balance is the amount remaining after a series of entries have been made.?

To summarize:

An increase in credit will reduce debits and an increase in debits will reduce credit. This is the difference between debit and credit. Knowing this will help you manage your expenses and income.?If you’d like to free up your time to concentrate on growing your small business, ask us how we can assist you with accounting services that can give you a fresh perspective—and keep you focused firmly on the future.?