Part 3 – Debits and Credits…
Seriously, what is a Debit and a Credit… I mean… Seriously?
Everyone hates debits and credits because… well… they’re confusing, but we’ll go through it step-by-step here.
- Let’s start by clearing out the wrong ideas.
- Debits and Credits are not always positive and negative. The determining factor is the type of account that is being debited or credited.
- Don’t relate “Credit” to a credit card or a line of credit… you’re just making this tougher.
- Don’t relate “Debit” to a debit card.
- Yes, I realize that a debit card is used to take money out of the bank, which decreases the bank account’s value. However, in accounting, debiting a bank account increases the value… it doesn’t make sense. That’s why all preconceived notions or understandings of debits and credits need to be forgotten.
- To actually start, imagine a “T” below each account:
- Alright, you didn’t really have to imagine ‘cause I kinda’ put one there for you. The “T” seems pointless, but get excited…
- Now, look at the same picture with new words on it!
- Well, that was the climax!!!… yeah… it’s accounting… not too exciting.
- One of the most important rules is that debits are always on the left side of the “T” and credits are always on the right side of the “T”.
- Now we’re going to clear up all the confusion… Whether a Debit/Credit increases/decreases the value of an account depends on the type of account being debited/credited. The next blog describes the different types of accounts, but below is a list of account types and whether or not debit/Credits increase or decrease their value.
- All account types can be grouped into 5 main account types, which are shown below. (This is a good chart to print out as a reference.)
- We’ll use the quartered setup of this diagram throughout the rest of the blog. The account types are split-up for a few reasons, which we’ll cover as we get to them.
- All account values on the left (Assets & Expenses) are increased with a debit. All account values on the right are decreased with a debit.