Debit and credit are the two aspects of every financial transaction. Debits and credits are the backbone of any accounting system. Every entrepreneur should know the rules of debit and credit .Entry in the general ledger contains both a debit and a credit. It is a basic rule of debit and credit that all debits must equal all credits. For every increase debit account, there is an equal decrease in credit account and vice versa. This keeps the entry in balance. Also, debits always go on the left and credits on the right. Make sure you understand debits and credits and how they increase and decrease each type of account.
For example, an owner invests $10,000 in the company. Since money is deposited into the checking account, cash is debited (the balance increased by $10,000). An equity account called owner’s equity or capital contribution receives a credit. Since equity accounts are negative accounts, crediting this equity account increases its balance by $10,000. This is also an example for the difference between debit and credit.
Another example, a Company borrowed $5,000 from a bank. Since the money will be deposited into the checking account, cash is debited (the balance increased by $5,000.) Liability account is called as loans payable (create a separate account for each loan). Liability accounts are credit accounts, so crediting the liability account increases its negative balance by $5,000.
An asset is an item of value owned by a company. Assets may be tangible physical items or intangible items with no physical form. Assets add value to a company, and are important to a company’s continued success. The cash in your bank account is an asset. So is the company car you drive.
A liability is an obligation of the company to transfer something of value to another party. Accounts payable are liabilities, since they represent your company’s future duty to pay a vendor.
Income refers to the amount of capital a firm acquires by the end of a financial year through revenues and gains. Income in the business flows from different sources, but the main source of income is revenues from the business’s core trading activity. Income is a credit balance.
A real account transaction for a business is considered as debit if the transaction is bringing assets into the business it is considered credit if the assets are going out of the business. It is an asset, liability, reserve and capital accounts that appear on the balance sheet of a business. Real account balances are permanent and at the end of the accounting period they are transferred into the next accounting period.
Any entrepreneur should be well versed with debit and credit accounting with cash being one of the most important assets, keeping financial track is very important. Always have cash offset for unexpected or expected movement of cash for your business. Your money is very important for you, don’t let it go in a wrong hand or let anyone misuse your money.