Accounting - Basic Guidelines on What is a Debit and What is a Credit

I am going to confine myself with the various Debits & Credits which are published on the Balance Sheet.

The reader is most probably going to ask "What about the Income Statement & the Cash Flow Statement?" Well, these documents merely reflect more detail as to what already appears on the Balance Sheet... that is why I have chosen not to dwell on them to a greater extent!

So, taking the Balance Sheet:-

• DEBIT: Means - Anything Owed to the enterprise/business (expressed in money terms).
• CREDIT: Means - Anything Owed by the enterprise/business (expressed in money terms).

It is as simple as that!

"Hmm!...", you might say, "It can't possibly be that simple."

But, just think about it...

1. Most of the entries on the Balance Sheet are self-explanatory (accountants just tend to use strange language; however, a simple search on the Internet will do the translations for you).
2. There are three items which need a bit of additional thought:-
   • The Bank Account: Just remember these two points: (1) Unless you keep your money "under the bed", the Bank owes money to you; and, (2) If you are operating without it, you owe money to the Bank.
   • The Accumulated Profit/(Loss) Account: Here, all detail as to how you have made your profit (or loss) is to be found on the Income Statement - the Balance Sheet entry merely "squeezes" it down to one entry.
   • The Cash Flow Statement is merely the detail as to how your Bank Account has come to be what is reflected (in a "squeezed" fashion) on the Balance Sheet.

When it comes to understanding the Income Statement & the Cash Flow Statement:

• Income Statement DEBITS mean... Expenses incurred ("Baddies")
• Income Statement CREDITS mean... Income obtained ("Goodies")
• Cash Flow DEBITS mean... Money Received into the Bank account ("Good")
• Cash Flow CREDITS mean... Money Paid out of the Bank account ("Bad")

That is it! From the above, it should now be readily apparent to the reader that the Balance Sheet is the main Financial document - it must be read (and understood) if ever one is going to manage one's enterprise/business.

Of course, there is much more that could be said but I hope that this article has served its purpose in providing you with a simple starting point.

With nearly 50 years of experience behind him in the provision of Accounting & Business services to Small & Medium sized businesses in a wide variety of commerce & industry, Peter is well placed to offer his advice and experience to others. His services have been available through his corporation: Galofin Services cc since 1985. Please visit http://www.galofin.com for more information... you can also visit Peter's blogs through this same website.