What are debits and credits?
29/06/2020

You may have come across the terms debit and credit and perhaps wondered exactly what do they mean?

Certainly, if you are a bookkeeper or accountant you will or should understand their significance.

The first book on the subject was written by Italian mathematicians in 1494.

Essentially, double entry means that every transaction that can be measured in monetary terms has two effects. For example, if you buy stationery for £25 you incur a stationery cost and reduce your cash in hand. In bookkeeping parlance, stationery costs are debited with £25, cash in hand is credited with £25.

Readers will appreciate that if all transactions can be classified in this way then the total of all debits must equal the total of all credits.

A Balance Sheet is proof that this is the case – total assets (debits) must equal liabilities plus business capital (credits).

So far so good, but why is this important?

Double entry was a useful tool when account’s ledgers were handwritten as it provided proof that all entries made had been considered from a debits and credits perspective. 

In some respects, accounting software takes care of the double entry for you. In the above example when you post a cash payment of £25 you will tell the software it is for stationery and when you click enter, the software will make the underlying double entries for you.

Which is unfortunate. Using account’s software does not require that you understand the debits/credits logic, but if you do understand the logic it is a priceless tool to appreciate the meaning and construction of the accounting reports produced.


About Us

We are qualified and experienced medic accountants and business advisors who have been in general practice for over 20 years having helped medic & dentist clients in meeting their aims of maximizing profits and both retaining and building on the rewards of their hard work.

Newsletter

With our newsletter, you automatically receive our latest news via e-mail and get access to the archive including advanced search options!

» Sign up for the newsletter
» Login

Contact Us

Medic Accountants
Cromer Business & Innovation Centre
North London Business Park
Oakleigh Road South
London N11 1GN
Ph: + 44 (0) 207 183 0034
Fx: + 44 (0) 207 100 1082
Registered in Companies House England & Wales

Birmingham office
Cambrai Court,
1229 Stratford Road,
Hall Green,
Birmingham,
B28 9AA
Ph: 0121 285 4550
Fx: 0121 285 4551

Copyright © 2018 - Medic Accountants company. All rights reserved.  Website Privacy Policy