Easy Understanding of Bookkeeping - Part 2 Debit and Credit

Easy Understanding of Bookkeeping - Part 2 Debit and Credit
-- Introduction --

In Part 1, I explained in simple terms the meaning of
Bookkeeping and Double Entry.

In Part 2, I will explain the basis of the Double Entry
System, the Debit and Credit.

-- When to Debit and when to Credit?

The most difficult and crucial part of the Double Entry
System is to know what information or data is to be entered
as a Debit and what information or data is to be entered as
a Credit.

I have known students who when they were starting to learn
accounting and bookkeeping would start by memorising what
to debit and what to credit.

The danger in this is, if they were to come across an item
that they have not come across before and have not
memorised it yet, they will not know what to do with it.

Do I debit or credit?

Everyone that I have taught bookkeeping, I have always
shown them a very simple way to remember this principle of
what to debit and what to credit.

All you have to remember is the D in Debit.

Now think of nothing else in terms of debit and credit.

Just relate D to DEPOSITS.

Right, now we take the example of the $100 Sales in Part 1.

When we receive the $100 cash what will we do?

We would of course DEPOSIT it into the bank.

So, we would DEBIT "Bank Account" and since it is a sale we
would Credit "Sales".

Is that simple enough?

Expanding on this rule, we now can say, since cash is
value, any value coming in would be a Debit.

We have seen the example of a cash sale.

Now let us look at a cash purchase or expense.

When we purchase or spend on something, anything, the value
coming in would be the item itself since cash is going out.

We therefore, debit the item's Account and credit "Cash
Account".

So we would debit, goods purchases, electricity paid, wages
and salaries, rental paid.

Sounds easy enough, but what happens when no Cash is
transacted.

The rule still applies, but the value in or out no longer
goes to Cash Account.

For example, if we were to sell goods to ABC Company on
credit and no cash were to come in, we would simply debit
"ABC Company" instead of "Cash Account".

Here "Cash Account" is substituted with what is known as a
"Debtor Account", in this case "ABC Company".

So the only thing to remember is that any "VALUE" coming in
is to be debited and the corresponding account is to be
credited.

----------------------------------------------------
I have been in Management since the 70s, IT since the 80s
and since the late 90s I began merging all my expertise
into Internet Businesses that includes Accounting Software,
Online Bookkeeping Services, Online Travel Booking System
and Online Shopping Catalog.
To view my products and services go to
http://www.multibizlink.com
To subscribe to any of my FREE tutorial, or for more
information on Bookkeeping email me at
rajaidris@multibizlink.com