Debits and Credits

See Also:
Accounting Asset Definition
Accounting For Factored Receivables
Financial Accounting Standards Board (FASB)
Imprest Account
Accounting Fraud Prevention using QuickBooks
Accounting Income vs. Economic Income

Debits and Credits Definition

Debits and credits, defined as the double recorded method which is the centerpiece of accounting, are used by accountants across the world. The benefit to using debits and credits, is that they provide double redundant record keeping for expenditures; money is both added and subtracted. This creates 2 places for expenses on financial records, thus preventing issues from improper recording.

Debits and Credits Explanation

Debits and credits, explained as the error-proof method for accounting, allow accountants to have twice the records. Debits and credits basics exist as such: there is a debit and credit account for each of the journal entries. Debit accounts is where money is taken from the company. Whereas credit accounts is where money is added to a business.

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Debits and Credits History

Debits and credits accounts were formally invented in the 15th century by Luca Pacioli, as an official system to specify what was already used by merchants in Venice. These formal roots trace as far back as the Roman empire. There a side for a creditor and a side for a debtor existed. They used this system in the Middle East, Florence, and the Mediici bank. They finally found a home in Venice.

Debits and Credits Rules

In either of these, a debit or credit can occur. If a debit occurs in a debit account, then the company loses money. If a debit occurs in a credit account, then money is taken from a company to be later added to another company credit account. To make the double entry work with this contra accounts were created: accounts which exist merely to balance the effect happening in another account. This is how debits and credits double entry can occur. It may seem confusing to the average person, but accountants love that this method is redundant. It lends to pristine recording, which you can check in multiple places.

Debits and Credits in Bookkeeping

Any respectable accountants uses the double entry bookkeeping method. For example, debits and credits in quickbooks allow the system to make sense to the accountant as well as the untrained record-keeper. Through software like Quickbooks, this method has become readily available and useful for everyone.

Example

For example, Steven is a part time bookkeeper for a small boutique in a strip mall near his house. He shows up to keep records for the company owners, who are too busy with the operations of their business. Quickbooks is Steven’s best friend when he is in the office.
But Steven never understood how credits and debits work. Then, one day, the company accountant visited the office. He was able to pick her brain. The experience was quite enlightening.
The accountant told Steven about how double entry bookkeeping works. By showing t accounts debits and credits examples he finally understood. This eventually proved useful.
One day, Steven overheard the owners express how their financial records had an error. After listening, he was able to look at the records. He took his knowledge of accounting, recently learned, to move an unnamed expense in the software. This corrected the problem, and the owners even gave Steven a bonus.
Understanding credits and debits in accounting has greatly helped Steven. After his experiences, he decided to become an accountant. And he will work closely with these records for the rest of his life.
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