Knowing the difference between debits and credits in your bookkeeping will ensure that you and/or your accountants have an easier time balancing your books. You always want to be sure that your entries are accurate and correct. This will go a long way in helping you make sure that you are entering the correct data each and every time a transaction is completed in your business. As a business owner, revenue is responsible for your equity increasing. The normal balance for your equity is called a credit balance, and as such, revenues have to be recorded as a credit and not a debit. At your accounting year’s end, all revenue account credit balances have to be closed and then transferred to your capital account, thus increasing your equity. When dealing with a corporation, credit balances go into what is known as Retained earnings, which is essentially a stockholder’s equity account. In this guide, we will discuss what all this means and why revenue has to be recorded as a credit.
You may find it helpful to consider the accounting equation of: Assets = liabilities + owner’s equity Since assets are shown on the left side of the accounting equation, the account balance will go there, as well. Liabilities, on the other hand, are shown on the right side of the accounting equation, with their account balances located on the right side, also known as the “credit side.”
To help you better understand why exactly revenues are credited, consider that a business gets $1,000 for a service that it provides, thus earning that $1,000. The business’s assets will then increase, and as such, these assets will be recorded as a debit of $1,000 to “cash.” It’s a must for all entries that are debited to equal out as credits, so the business will get a $1,000 credit that gets recorded in Service Revenues. And since a credit entry is now present in the Service Revenues, your equity will effectively increase as a result. If you have a customer that purchases your services for, say, $700 but you allow them to pay you over the course of 30 days, your accounts receivable will receive a $700 debit. Still, the revenue was earned and must be recorded as such. This means that you will need to record a $700 credit in the Service Revenues . This also translates to your equity increases as a result. Let’s look at another example for good measure. Let’s assume that you sell motherboards for $300. A customer buys one and you deposit the $300 into your business’s bank account right away without delay. With that $300 in the books, you will need to be sure to update your business’s accounting data. Remember, this sale will first need to be recorded as a debit entry in the cash account. The $300 will need to be entered into the left side of the assets chart. The sales part of your accounting will be listed under “revenue” as a credited amount of $300, thus balancing everything out in your books.
Both of these entries are necessary in order for your bookkeeping to balance out correctly. Debits serve to increase expense or asset accounts while reducing liability, equity, or revenue accounts. Credits are essentially the total opposite. When a transaction is recorded, all debit entries have to have a credit entry that corresponds with it while equaling the exact dollar amount. Now that you know that debit and credit bookkeeping entries have to balance out one another, let’s take a closer look at their differences. First, think about the accounting purposes of these entries and how every transaction has to be exchanged for something else that has the exact same value. Debit entries are designed to add a positive number to your journal, while credits add a negative number. You won’t see written pluses and minuses in the journal entries, so it’s important that you get familiar with this format. To help you remember this, a debit will always be positioned on the left side of an asset entry. Keep in mind that a debit serves to increase expense or asset accounts, while decreasing revenue, liability, or equity accounts. A credit will always be positioned on the right side of an asset entry. Whereas debits decrease revenue, liability, or equity, accounts, credits increase them while decreasing expense or asset accounts.
To break it down in the simplest of terms, debits and credits serve as a way to record any and all transactions within your business’s chart of accounts. This is your company’s income and expenses. Let’s take a moment to look a little closer into the five major account types.
Your company needs assets to successfully operate and stay in business. Without assets, you won’t be able to keep your doors open. So, what makes up assets in your asset accounts? Let’s explore some of its subgroups.
This can come from a variety of sources, but they all account for aspects of your company that are designed to make you money.
Next up is expense accounts. These are monetary charges that are needed to ensure your business can successfully function each and every day. Some of the subgroups found within expense accounts include:
Just like your liabilities, your expenses must be kept close track of to ensure that your revenue is put to proper use. Without expenses properly and promptly paid, your company could suffer from consequences that affect your normal operations.
When your business makes a sale to a customer, either from a product you carry or a service that you provide, revenue is earned for your company. Additionally, revenue can be made from the interest that you receive from investments. Some of the subgroups found within revenue accounts include:
Sales and services are going to be the most common ways that your company earns revenue. Seasoned business owners are always on the look-out for new ways to incorporate revenue building in their organization.
Any fees that your business is required to pay are known as liabilities. These costs can vary from business to business and industry to industry. What line of work you are in can play a role in the type of liabilities that your company is responsible for. Some of the subgroups that can found within liability accounts include:
It is imperative that you make doubly sure to keep up with your liabilities at all times. Without the services that these entities provide, the behind-the-scenes operations of your business will diminish quickly. Sure, you might be able to skate by on your own for a little bit, especially if you’re a smaller business. But soon, you will be met with more hassle than you can handle. With the right people in place, you can look forward to your operations running smoothly.
And lastly, we have equity accounts. After liabilities have been paid, equity is the net that your business makes. This doesn’t include non-operational assets. Some of the subgroups found in equity accounts are:
As you can see, this is the funding that your brand pulls in after its responsibilities are met and paid. It is important that you keep a tight grip on this income, as it can cause some serious imbalances within your books and record-keeping if it isn’t properly accounted for. While the same is true for all accounts, many first-time business owners make the mistake of improperly calculating and accounting for equity due to not covering liabilities correctly.
Now that you have a better understanding of debits and credits, you should find it much easier to keep track of your finances as you work toward improving your business operations. This will also play a big role in supporting your quest to earn more revenue for your brand. Successful business owners want their books to balance at all times. This is just one part of making sure that this happens. For more information and helpful tips, be sure to read our other articles. We have a wealth of resources available that are designed to assist business owners in growing their companies . Here at Seek Capital , we want you to be as successful as you possibly can be. With the right guidance and direction, you can learn how to make the most of your business venture while discovering new and exciting ways to increase revenue, secure business loans , and much more. Sources https://www.accountingcoach.com/blog/what-is-owners-equity https://www.freshbooks.com/hub/accounting/is-service-revenue-an-asset https://bench.co/blog/accounting/accounts-receivable/