September 2021
Michele Baker provides some top tips for getting your debits and credits right.
Question, do you know your debits from your credits?
If I were to ask my (much) younger studying self that question, the honest answer would be no. However, I was very good at learning and memorising!
But this creates a problem.
You can only memorise what you have been given. So how can you deal with scenarios you haven’t already encountered?
We cannot teach every possible scenario, so it is vital to work on your understanding.
Techniques to tackle debits and credits
These tips and explanations will firm up your understanding.
You will learn in your studies that there are different ‘types’ of accounts: Income Accounts, Expense Accounts, Liability Accounts and so on. Using the acronym DEAD CLIC (Debit – Expenses, Asset and Drawings, Credit – Liabilities, Income and Capital) can help determine whether we need to make a debit or a credit entry to increase an account, to decrease that type of account we would just do the opposite! We may not completely understand this at first but we can use other techniques to help with our entries.
• You must make equal debit and credit entries for each transaction.
• If you debit one account, the entry in the second account will always be a credit.
• Try not to think about everything as money, think about what is actually happening. For example; if we buy stationery, we would have paid money for it but in return we have received the stationery. This is a common one!
Examples of debit and credit entries
Let’s have a look at some entries now.
We sell goods and the customer pays by cheque. The entries we need to make in the accounts would be: Debit the Bank Account and Credit the Sales Account. But why are these the entries we make?
Think of Debit as IN and credit as OUT. Now look at the entries again, the money has come into the business so we debit the Bank Account.
The goods we have sold have gone out of the business so we credit the Sales Account.
This can be a good method to use while you are learning the basics. It is a little simplistic when transactions become more complex, but as an ‘Aide memoir’ it can be a good starting point.
I talked earlier about understanding the different types of accounts, so let’s have a look at this too.
The Sales Account is an Income Account, and this can sometimes cause confusion. When we hear the word income our first thought is money and if that is the case why do we credit an income account?
It is the goods sold leaving the business that generates the income.
The money we receive is debited in the Bank Account which is an Asset Account. Asset accounts record anything we have or are owed.
Another useful way to remember entries is to Debit the Receiver and Credit the Giver.
For example, we buy goods for resale. The Purchases Account (the receiver) is debited because the goods have come into the business. The Bank Account (the giver) is credited because the money has gone out of the business.
Again, we can look at this in terms of the types of accounts we are using. The Purchases Account is an Expenditure Account. This is because the goods coming into business increase its costs. The Bank Account is an Asset Account. When we credit this account, it reduces the money we have and therefore the value of the asset. DEAD CLIC shows us to debit an asset to increase it and therefore as we are decreasing the asset, we do the opposite and make a credit entry.
Remember that you are learning something new. Everyone learns differently so find a method that works for you. Don’t be too hard on yourself if it doesn’t come as easily as you hoped! Confidence and understanding only come with practice.
We’ve all had to start somewhere and starting at the beginning is always the right choice. We’ve all hit stumbling blocks along the way, the key is not to give up.
Michele Baker is a tutor at Training Link. She has been tutoring for 15 years and has contributed to PQ magazine’s Back to Basics video series.
