Debits & Credits – An explanation

So Debits and Credits. We spoke recently about double entry and debits and credits are a fundamental part of this whole concept. We generally find when talking with clients who are typically in a start up phase (and are trying to do everything themselves!) that debits and credits confuse the hell out of them!

You can explain debits and credits in many different ways. In a traditional T accounting set up debits go on the LEFT credits on the RIGHT is clicking yet?

It’s the opposite of how your bank sees it!

Just to confuse things even more it’s actually the opposite of how your bank would show debits and credits. If you think about it this actually makes sense. If you owe the bank money then the bank sees you as a creditor, if you have money in the bank then you’re effectively a debtor and the bank basically owes you that money!

So how do you work out whether a debit increases or decreases an account balance? Well assets (like motor vehicles etc) and expenses (rent, stationery etc) are increased by debiting them and vice versa. Liabilities are effectively increased by crediting them. Check out the table below, maybe that will make it clearer

So do debits and credits confuse the hell out of you? Do you have a better way of remembering them? Let us know in the comments and we’ll do what we can to help.