Credits, Debits, and Double-Entry Accounting

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All business transactions take place in at least two accounts.  Because of this, the double-entry method of accounting is a commonly used system.  In double-entry accounting, transactions are recorded as debits and credits.  For instance, if your business takes out a loan, the money received affects your cash account, also referred to as current assets, and is recorded as a debit.  Your notes payable account is credited the same amount.  The single transaction has now been recorded in two separate accounts, hence the term “double-entry”.  As loan payments are made to the bank, the cash account will be credited the amount of the payment and the notes payable account will be debited.

Understanding the full landscape of debits and credits and their function within the double-entry accounting system can be tricky.  On a basic level, when money coming in to one account is recorded, there should be another account showing the same dollar amount coming out.  The cash account gaining money is referred to as a debit.  When it pays money out, it is credited.  Each time this happens, there is an opposite recording in a corresponding account.  This helps to provide an accurate reference of cash on-hand and money owed.

It may seem confusing that added money is referred to as a debit and money subtracted is referred to as a credit.  When you deposit money in to our bank account the teller may refer to the transaction as crediting your account.  When we use our bank card to purchase an item, we often call that a debit.  The reason for this is that the deposited amount is debited to the bank’s general ledger.  Since they owe you the deposited amount, they refer to it as a credit towards your account.

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