Charges and loans form the basis of the double entry accounting system. Without understanding how they work, it is very difficult to make entries in the company’s general ledger. Is purchases a debit or credit?
Debits and loans: why are they important?
Every business transaction has a buyer and a seller. A company sells a product or service to a client or client. Most companies use a double accounting system to track their transactions. Double entry accounting requires a registration system that uses debits and credits.
Determining whether a transaction is overdraft or credit is a difficult part. T-accounts appear here. T-accounts are used by accounting instructors to teach students how to perform accounting transactions.
T accounts are simply an account, such as receivables, visually saved “T.” For this account, each transaction is recorded as a charge or credit. This information can then be transferred to the log from the T account.
Use of debit and credit
Whenever an accounting transaction is created, it always affects at least two accounts, with the debit entry being recorded on one account and the credit entry being recorded on the other account. There is no upper limit on the number of accounts involved in the transaction – but the minimum is not less than two accounts. The sums of debits and credits for each transaction must always be equal, so the accounting transaction is always said to be “in balance”. If the transaction were not in balance, it would not be possible to create financial statements. Thus, the use of direct debits and loans in a two-column transaction recording format is the most important of all accounting accuracy checks.
There may be considerable confusion about the inherent importance of direct debit or credit. For example, if you charge your cash account, it means that the amount of cash at the checkout increases. However, if you charge your account, it means that the amount you owe is less. These differences arise because debits and credits have different effects on several different types of accounts, which are:
- Asset Accounts Charging increases the balance and credit reduces the balance.
- Liability accounts. Charging reduces the balance and credit increases the balance.
- Capital accounts. Charging reduces the balance and credit increases the balance.
Examples of debits and loans
To better understand the basics of record keeping, let’s look at some examples of charges and loans.
Say your company sells a product to a customer for $ 500 in cash. That would give us $ 500 in revenues and cash in the amount of $ 500. You save it as an increase in cash (asset account) by direct debit and you increase the income account by credit.
Looking at another example, let’s say you decide to buy new equipment for your business for $ 15,000. Equipment is a fixed asset, therefore the cost of equipment should be added to the fixed asset account as a burden of USD 15,000. The purchase of equipment also means an increase in commitments. You will increase your liabilities account, crediting them with USD 15,000.
Here are some additional examples of accounting basics for direct debits and loans:
- Business loan repayment: debit loan liabilities and cash loan account.
- Sell to a customer on credit: Receivables due and debit crediting.
- Buy stocks from a supplier and pay with cash: Charge your inventory account and fund your cash account.