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Debits and Credits 101
Are you new to the world of accounting and feeling a bit lost when it comes to debits and credits? Don’t worry; we’re here to break it down into simple terms for you, with easy-to-understand T-chart examples.
Imagine your finances as a seesaw. On one side, you have debits, and on the other, you have credits. When one side goes up, the other side goes down. Let’s see how this works with some examples:
- Debits: Think of debits as additions or increases. When you make a debit entry, it’s like putting money into an account. So, debits go on the left side of your financial ledger. They’re used for things like buying stuff or spending money.
- Credits: Credits, on the other hand, are like subtractions or decreases. When you make a credit entry, it’s like taking money out of an account. Credits go on the right side of your ledger. They’re used for things like receiving money or paying off debts.
Let’s look at some simple T-chart examples:
Example 1: Buying Inventory
You buy inventory for your store, paying $100 in cash.
| Account | Debit (+) | Credit (-) |
|---|---|---|
| Inventory | $100 | |
| Cash | $100 |
Explanation: You debit (add) $100 to the Inventory account because you’re increasing your inventory. You credit (subtract) $100 from the Cash account because you’re spending cash.
Example 2: Receiving Payment for Services
You receive $200 from a customer for services rendered.
| Account | Debit (+) | Credit (-) |
|---|---|---|
| Cash | $200 | |
| Revenue | $200 |
Explanation: You debit (add) $200 to the Cash account because you’re receiving cash. You credit (add) $200 to the Revenue account because you’re earning revenue from providing services.
Understanding debits and credits is like learning a new language, but with these simple T-chart examples, you’ll start to see the pattern. With practice, you’ll become a pro at managing your finances like a boss!