Ever feel confused by the terms “debit” and “credit” in accounting? You’re not alone! This guide explains these terms in a simple way, showing how they keep your business finances organized.

Imagine your business as a collection of buckets, each holding a specific type of money.

• One bucket might hold all your cash (the “cash” bucket).
• Another could represent the value of your office furniture (the “furniture” bucket).

Debits and credits are like labels on these buckets, keeping track of money flowing in and out.

• Debit (DR): This means money is flowing into a bucket. Think of it as “depositing” money.
• Credit (CR): This means money is flowing out of a bucket. Think of it as “withdrawing” money.

Let’s see debits and credits in action:

• You deposit $300 cash in your business bank account. We debit the cash bucket by $300 (money came in).
• You buy a $600 ergonomic desk from your friend. We credit the cash bucket by $600 (money went out) and debit the furniture bucket by $600 (value came in).

Here’s the key point: 

Every debit (money coming in) has a corresponding credit (money going out). They work together to show the complete picture.

Different Bucket Types:

So far, we’ve focused on asset buckets (things you own). But there are other types:

• Liability buckets: These track what you owe (like loans). When you take out a $1,000 loan, we debit the cash bucket and credit the “bank loan” bucket (your debt goes up).
• Equity buckets: These track what investors put into your business. If your mom invests $1,000, we debit the cash bucket and credit the “equity (Mom)” bucket (her claim on the business increases).

A Handy Trick:

While there are specific rules for debits and credits with different accounts, here’s a simple trick to remember:

• Debit = INcrease (money coming into a bucket)
• Credit = OUTcrease (money going out of a bucket)

The Bottom Line:

Understanding debits and credits helps you manage your business finances effectively. By tracking money flow, you can make informed decisions about spending, saving, and growing your business.

Need more help? 

Codigsys bookkeeping services can guide you through recording transactions using debits and credits. Book Free Consultation.