Bookkeeping 101 (Part 1): Debits, Credits, & Other Lingo
June 19th, 2019 | Accounting & Bookkeeping
To a fair amount of business owners, bookkeeping can seem like this complicated jungle of strange lingo, and accounts they have never heard of before. However, bookkeeping can be quite simple once you know what all of these foreign words mean. Today we are going to give you a list of basic bookkeeping lingo to point you in the right direction, and maybe even help you get prepared for tax time EARLY! (we won’t get our hopes up too high though). These are some of the most basic terms in bookkeeping, and you probably even know a few of them already.
What are Debits and Credits?
Before we get to debits and credit we have to talk about single and dual entry accounting systems. Single entry accounting is when you only make 1 entry, for example, like in a checkbook. Dual (or double) entry is when you make 2 entries. This is the accounting style we will be talking about today. Debits and Credits are the 2 entries you will make in the appropriate account for every transaction. Here is a list of basic accounts:
Cash – See, I told you that you would know at least one of these.
Accounts Receivable – if you sell something or perform a service, but don’t get paid right away like an invoice, for example, it’s called a receivable.
Accounts Payable – If you buy something but don’t pay right away, like vendor credit, it’s called a payable.
Inventory – This is a count of the finished products you have on hand. This can also include raw materials, and work in progress, but to keep it simple just think finished goods.
Sales – this account keeps track of your product sales.
Expenses – things that you buy for your business.
Revenue – This is all the money that you’ve earned. For example, if you sell products and services, you would have sales and service revenue to add together and make revenue.
So what happens when I make a transaction?
When a transaction happens there are only 2 things that need to happen. First decide where to put the debit, second decide where to put the credit (in any order). Here is an example:
You have a Consulting business and just invoiced a client for services due in 60 days. Since they have up to 60 days to pay you, log this as an Accounts Receivable transaction. Also since your earned money, this would also be a Revenue transaction. So now that we know which accounts to use, how do we know which one is a debit or credit. It’s simply one of those things you have to know so here is a small “cheat sheet” to help:
Asset accounts. A debit increases the balance and a credit decreases the balance.
Liability accounts. A debit decreases the balance and a credit increases the balance.
Equity accounts. A debit decreases the balance and a credit increases the balance.
Revenue accounts. A debit decreases the balance and a credit increases the balance.
Expense accounts. A debit increases the balance and a credit decreases the balance.
Using the cheat sheet above we could notice that a Revenue increases with a credit, so we would then credit our revenue account. How do we know what to do with accounts receivable? Well, there are only 2 options so the other account has to be debited.
So that is a simplified version of debits and credits, and some basic accounting that you would use in your small business accounting. If this is making you wish someone else could do this for you, then you are in luck! With Neat’s find an accountant tool you can easily find an expert to hand these small details for you. Get started today with a free trial!
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