Home Tutorial Debits and Credits

Lesson 1

Basics of bookkeeping

What is a debit and what is a credit?

The debit and credits will TELL A STORY of your company’s financial transactions!

Keep this in mind. A debit MUST always correspond with a credit entry! This will ensure your books are BALANCED! Thus a “Balance Sheet”

Let’s think in terms of your bank account.

Whatever monies is in your bank account is AN ASSET to you as it belongs to you or your company.

If you have a CREDIT CARD account, whatever shows up in your statement is a CREDIT, meaning a liability, an amount you owe the bank.

So, starting from the above concept, we will explore debits and credits.

When you sell something for cash, what happens?

You receive a cheque from your customer and you banked it into your bank account. Your asset has increased because you have MORE money!

You will now do your accounting entry.

Debit Cash at Bank S$10,000

Oh dear!! You CANNOT do a single entry in accounting, so where does the other CREDIT go to?

Yes, you will have to CREDIT your Sales account!

Why credit sales?

Remember, that debits and credits are story telling tools? You will tell your reader (probably the income tax authorities), the following story:

Debit    Cash at bank   S$10,000 - I put S$10,000 into my bank account

Credit     Sales               S$10,000 - I received the S$10,000 from selling goods

This is how it used to be without computers so that you will know WHERE to look for the corresponding entry in the journal books.

In today’s context, the software application should easily print out the audit trail if you do not know where the “debit” or “credit” came from!

So, a debit is what you have or have bought, it is what you “own”. Therefore, when you make a cash purchase, the following would happen.

Debit    Purchase expense   S$5,000        (I now have $5,000 worth of goods)
Credit     Cash at bank             S$5,000       (I paid from my bank account)
(Being purchase of inventory)

In simplistic terms,
You debit when you buy an asset or you incur an expense and you credit when you reduce your asset or increase your liability.

We will go into details at a later stage.