1. Money

Bookkeeping 102 - Understanding and Using Debits and Credits

By

1 of 6

Debits and Credits - Why are They Important?
debits and credits, an explanation
jim frazier

Every business transaction has two sides. There is a buyer and a seller. The business sells a product to a customer who buys the product. In order for a company to be able to keep track of its myriad of transactions, most use a system of double-entry bookkeeping. Double-entry bookkeeping requires a recording system using debits and credits.

Debits and credits are traditionally hard to understand as a part of accounting. They are not very intuitive. So, we have to come up with some rules to follow so we don't make mistake when doing the books for a company. The first, and most important, rule is that debits are always shown on the left of a t-account and credits are always shown on the right. Once you understand that, you have come a long way in understanding debits and credits. The challenge comes in knowing when to debit an account and when to credit it.

Next step: How to record debits and credits as journal entries

©2014 About.com. All rights reserved.