Debits and Credits

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     One of the most important topics regarding the Finance module is how Debits and Credits work. They are very easy for a novice bookkeeper to mess up and can still be tricky after years of experience. To mitigate this confusion Shepherd’s Staff uses what is called Double-Entry Bookkeeping. Double-Entry Bookkeeping is so named because every transaction must involve at least two accounts; one (or more) which is decreased and one (or more) which is increased.

     

     To begin our discussion of Debits and Credits we will define terms:

  • Debits and Credits: Either increase or decrease an account balance depending on the account type. (See the list below)
  • Financial Equation: Assets = Liabilities + Equity
  • Balance Sheet: Shows your net worth in relation to your assets, liabilities, and equity.
  • Income Statement: Shows net income; Net Income = Revenue – Expenses.
  • Account Types:
    • Asset: Shows the property you own which increases the value of your balance sheet. Examples: bank accounts and accounts receivable.
    • Liability: Shows funds held to satisfy obligations; these funds decrease the value of your balance sheet. Examples: loans, accounts payable, and taxes.
    • Equity: Shows the net amount of funds invested in a business by its owners, plus any net income. In simple terms, Equity = Assets – Liabilities. Examples: capital/draw and retained earnings.
    • Income: Shows the revenue that you received during the fiscal year.
    • Expense: Shows the expenditures that you made during the fiscal year.
    • Dedicated: Shows the funds set aside for a specific purpose.
  • Account Norm (AN): Shows whether an account is usually debited or credited; this is always an increase.

 

Debits and Credits Chart

Account Type

Increase (AN)

Decrease

Asset

Debit

Credit

Liability

Credit

Debit

Equity

Credit

Debit

Income

Credit

Debit

Expense

Debit

Credit

Dedicated

Credit

Debit

     

     As you can see, debit and credits don’t always increase or decrease. Instead, they take on a different role depending on the account type. This is where they get tricky: the amounts of the debits and credits must match for a transaction to balance and they change roles. Here is an example of how a journal entry for a payment would be recorded in Shepherd’s Staff:

     This shows money being taken out of the asset account, via a credit, and money going into an expense account, via a debit.

     

     When you are writing a check, Shepherd’s Staff does more of the work for you:

     In the above example, it is automatically applying a credit to the asset account and a debit to the expense account because you are writing a check. Shepherd’s Staff does the work for you when you enter a deposit as well:

     In this example, Shepherd’s Staff is applying a debit to the asset account for $150, a credit to the liability account for $50, a credit to the income account for $50, and a credit to the dedicated account of $50.

     

     In conclusion:

  • Debits and credits are used to show how money moves between accounts.
  • Debits and credits either increase or decrease based on the type of account they are applied to; reference the chart above to mitigate confusion.
  • The debits and credits on a transaction must balance.
  • Shepherd’s Staff automatically selects the correct credits and debits for checks and deposits but not for journal entries.

     Please don’t hesitate to reach out to us here at Concordia Technology Solutions!

     Our phone number is (800) 346-6120 and our email is support@cts.cph.org.

 

 

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