When it comes to accounting, debit and credit is used when bookkeeping transactions.
Debit and credit are part of a system called double-entry bookkeeping.
In that system, each transaction is recorded in at least two places in your accounts. The reason we do it like this is to provide transparency about what your business owns and owes. With double-entry bookkeeping, all transactions can be verified by a third-party, such as an auditor.
When do you use it?
Debit shows where something was added to your business—whether that’s money, assets, or costs—while credit shows where something was removed from your business.
You would record a debit in your accounts when
- an asset increases in value
- an expense rises
- the company’s liabilities decrease
Let’s take a look at some examples.
Debit and credit explained
When it comes to accounting, plus isn’t always positive, just as minus isn’t always negative. It just shows the flow of money in your business.
If you purchase a headset for work for $500, you would record it as
- $500 in your inventory, since the value of what you’ve owned has increased (debit)
- $500 in your cash, since you’ve spent money (credit)
If you choose to pay via invoice, you would record it like this:
- $500 in your inventory
- $500 in accounts payable, since that is what you owe your supplier
Once the payment has been made, you would record it like this:
- $500 in accounts payable, since the debt has now been paid
- $500 in cash, since you’ve spent money
The debit and credit values should always cancel each other out. Otherwise, you’ve made an accounting error. You can do a bank reconciliation to try to find the error, or you can speak to an accountant who can try to help you out.
It’s always a good idea to use accounting software to make bookkeeping easier.
See also: 5 best online billing software
