”Oh, my bookkeeper knows, I don’t have to!” Nooo! That’s the first sign someone wants to just have a job in a business like theirs, not be the entrepreneur of it. Let’s look at the basic concepts debit (debet) and credit of bookkeeping, so you can begin to understand the hopefully monthly reports that your bookkeepeer sends you. This is a blog post in our beginner-level series First Steps Into Accounting on accounting and bookkeeping.
Basic Bookkeeping Skills
You don’t have to know the intricacies of bookkeeping, but as a business owner you must know the basic principles. You can’t read accounting reports otherwise. And if that’s the case, you can’t make good decisions for strategy etc.
Tax laws etc. also change regularly, and while it is the responsibility of an expert bookkeeper or accountant to know those, the implementation falls upon you.
If you have a webshop, it is of particular importance, since either you or someone you hire must set up value added tax (VAT, sv. moms, fi. alv) correctly. We will return to VAT in a later blog post, so let’s move on to explaining debit and credit next.
Debit And Credit
So, debit (debet in Latin, as used in Nordic countries) or +, and credit or -, a short intro! Here are three example scenarios peppered with emojis to help visually.
1. Product Payment With Cash
A customer pays with cash for a product.
A cash ? account receives money (debit +) and an explanatory event happens elsewhere (inventory ? account is credited -).
Earlier in this blog series we have discussed these events shortly and the way I described them was like a dance of numbers: one move is always followed by another. Scroll back to it if you missed this.
2. Business Loan
You apply for and receive a loan from the bank.
This means money into the bank ? account (debit +) and its explanation happens in a loans ? account (credit -).
When you make payments to decrease this loan, the action is reversed.
3. Purchasing Office Supplies
You buy stamps featuring a beautiful summer landscape for shipping a surprise summer gift to everyone, who has joined your customer-loyalty programme.
A cash or bank ? account decreases (credit -) and it is explained in the office-supplies ? account as an increase (debit +).
Take-home message for now:
- ⚖️ Every single event in double-entry bookkeeping has its counter-move elsewhere, in part to explain generic cash or bank account events, but also to increase likelihood of avoiding mistakes.
- ? When one bookkeeping account is debited, another is credited.
- + and – are relative to the type or function of the bookkeeping account. It can seem counterintuitive at first, but remember the simple situation when you buy something for the firm: money goes out so cash has to decrease, but in return you get the stamps and your stash of office supplies increases.
I love getting numbers to match up, but am no huge fan of bookkeeping. As mentioned before we have a bookkeeper and I feel calmer because they take care of monthly tax reports, staying on top of tax law, etc.
What are your thoughts on debit/debet and credit?
This is a blog post in our beginner-level series First Steps Into Accounting on accounting and bookkeeping.
Photo credit: Elena Mozhvilo.