Understanding Debit and Credit in Bookkeeping

For any of the businesses, profit is just like oxygen for a living being, without which it is very difficult to live. So, every business tries to achieve the required profit for its organization. But to achieve profit, it is essential to understand the financials of the business. Financial analysis helps to understand the cost incurred in the business and the income in the business, which helps to calculate the profit correctly.

So, if you want to acquaint yourself with bookkeeping, then you need to understand the basics of debit and credit. Debit and credit make it easier to make a proper entry in bookkeeping. But one must first try to understand the rules of debits and credits. Before understanding debits and credits, you also need to understand a few other terms in financial accounting. They are the basic things in financial accounting that help to get a proper idea regarding financial accounting.

1. Ledger

A ledger is a book where we record all the final entries. It is a principal book of accounts. Here, we maintain all the transactions related to the monetary accounts. It keeps a record of all ledger accounts. Hence, it keeps permanent records of all the transactions. Also, it helps in making financial statements.

2. Trial balance

A trial balance is an accounting report that keeps the balances of every general ledger account systematically. The “Debit Balances” list the entire debit balance amount, while the “Credit Balance” will list the entire credit balance amount. Therefore, to have a proper balance account, both columns must show an identical value.

The trial balance shows the actual health of the business, as it summarizes all business activities.

3. Financial Statements

A financial statement shows the actual financial transactions accurately happening in the company in a year. In addition, the financial data that the accountant maintains is useful for preparing a financial statement.

Types of financial statements

There are four major types of financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of changes in shareholder equity. While the whole financial statement shows the overall health of the company, each type of financial statement focuses on each aspect of the finances of the company.

• Income Statement: The income statement reports the revenue and expenses of the company.
• Balance Sheet: The balance sheet helps us to understand the company’s assets, liabilities, and shareholder equities.
• Cash flow statement: The cash flow statement helps to understand the cash inflow and outflow in the company.
• Statement of changes in shareholder equity: It gives details regarding the ownership stake in the company.

Debit and Credit in Bookkeeping

Debit and credit revolve around 3 rules for different accounts:

1. Real account: debit what comes in and credit what goes out.
2. Personal account – DEBIT THE RECEIVER AND CREDIT THE GIVER
3. Nominal account: debit all expenses and losses.

What is market capitalization vs. revenue?

Market capitalization bases the money amount for a company on its stock prices, while revenue is the inflow of money by selling goods or services.

There are many accounting software that follow debit and credit in a very systematic way. Also, they take care of the entries and automatically make the entries according to the account.

Accounting for non-financial transactions

In non-financial transactions, there are no changes in equity, income, expenses, liabilities, or assets because of a lack of financial transactions. For instance, a non-financial transaction includes hiring an employee in an organization where there is no journal entry.