The Cheat Sheet for Debits and Credits
The “Cheat Sheet” for Debits and Credits by Linda Logan, Partner/President/Founder of Fiscal Foundations LLC
Asset accounts have debit balances.
Debits increase Asset accounts.
Credits decrease Asset accounts.
Liability accounts have credit balances.
Credits increase Liability Accounts.
Debits decrease Liability Accounts.
Equity accounts have credit balances.
Credits increase Equity Accounts.
Debits decrease Equity Accounts.
Income accounts have credit balances.
Credits increase Income Accounts.
Debits decrease Income Accounts.
Cost of Goods Sold accounts have debit balances.
Debits increase Cost of Goods Sold accounts.
Credits decrease Cost of Goods Sold accounts.
Expense accounts have debit balances.
Debits increase Expense accounts.
Credits decrease Expense accounts.
Your bank account is an asset. It is something of value that you own. When you deposit money into your account, you are increasing that Asset account. What increases an Asset account? A debit.
CHALLENGE QUESTION – If a bank deposit is a debit to your bank account, why does your bank statement call it a credit?
ANSWER – Because the bank statement is stated from the bank’s point of view. The money deposited into your checking account is a debit to you (an increase in an asset), but it is a credit to the bank because it is not their money. It is your money and the bank owes it back to you, so on their books, it is a liability. An increase in a Liability account is a credit.
What you OWN – What you OWE = What you’re WORTH
ASSETS – LIABILITIES = EQUITY
This is the basic formula on which double-entry bookkeeping is based. Even if you have not had any training, I believe you can understand these principles. This is a common-sense formula. If you were to determine what your business was worth if you wanted to sell it, you would look at what the business owns that is of value (Assets), you would subtract your debt (Liabilities), and the result would represent your net worth (Equity). These are the types of accounts that are shown on the Balance Sheet.
For the next logical step, I’ll ask you to recall a little Algebra from high school. Remember that if you add or subtract an amount from one side of an equation, you must do the same to the other side in order to keep the equation equal. So we can do the following:
ASSETS – LIABILITIES + LIABILITIES = EQUITY + LIABILITIES
Now the formula can be stated as:
ASSETS = LIABILITIES + EQUITY
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While Assets, Liabilities and Equity are types of accounts, debits and credits are the increases and decreases made to the various accounts whenever a financial transaction occurs.
The cardinal rule of bookkeeping is that DEBITS must equal CREDITS.
There is no limitation on the number of debits or credits in a transaction, but the total dollars of each must be equal. Let’s take an example:
You go to Office Max and write a check for $2,605 to purchase a computer, paper and ink cartridges.
What accounts would be affected?
Office Equipment + Office Supplies = Checking Account
$2500 + $105 = $2605
DEBITS = CREDITS
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ASSETS = LIABILITIES + EQUITY
DEBITS = CREDITS
Asset accounts normally have DEBIT balances. When you deposit money in your bank account you are increasing or debiting your Checking Account. When you write a check, you are decreasing or crediting your Checking Account.
Liability and Equity accounts normally have CREDIT balances. If you borrow money from a bank and deposit it in your Checking Account, you increase or credit a Liability account, Bank Loan Payable, and increase or debit an Asset account, Checking Account.
Very cool site!
I’m looking to get out of New Mexico. Are you hiring?
John Lamenzo
John, thanks for your compliment! Fiscal Foundations has branch offices in Minneapolis/St Paul and Denton, TX. Our long term business plan includes establishing branches in major metropolitan areas around the country. We hope to attract professional bookkeepers/accountants and QuickBooks ProAdvisors such as yourself (I checked out your website too!) to join us when the time is right. In 2012, we will be interviewing for our Denton TX Branch, managed by an Advanced Certified QuickBooks ProAdvisor. If you’re interested in relocating to the Dallas/Ft Worth area and wish to be considered, feel free to contact us at info@fiscalfoundations.com.
Question: if I deposit a debt for credit to my deposit account so that I can exchange the credit for currency that will increase my liabilities, like buying a house or car, how would I word that endorsement?
PS: When claiming the house or car as a liability, I am posting a budget for the credit required to deposit for credit to operating account needed to settle the debts acquired while maintaining the house and car.
If you debit an assest account, what should you credit?
A debit to an asset account could be: 1) Creating an Invoice or Sales Receipt to a client: Debit bank account or Undeposited Funds if a Sales Receipt (indicating cash received) which credits an income account; or an Invoice debits Accounts Receivable and credits an income account; 2) If you purchased a fixed asset such as a vehicle, equipment, furniture, building, debit the fixed asset account and credit checking account if paid cash, credit a credit card if paid by that, enter a bill if paying later crediting Accounts Payable, or if took out a loan, credit the loan for the full amount or credit loan portion and bank account if made a down payment.
Can I sent money to a family member with my merchant account
This doesn’t sound like a business transaction, so you would need to record it as a personal transaction. This is not standard procedure, but here is a work-aroung. You would:
1. Add your family member to QuickBooks as a Customer and enter their credit card information in their record.
2. Set up an Item (Other Charge) in your Item List named Gift to Relative and set it up to debit Loan Receivable
3. Then, you would enter a Credit Memo (like a client refund) crediting Accounts Receivable and debiting Loan Receivable (Your Name or relative’s if they are going to pay you back) and select to
Refund via credit card.
4. Then process the refund through Merchant Services.
It’s always best not to mix business and personal money, but if you select the right accounts and record it as a personal loan or similar transaction, it is fine. You just don’t want it affecting your tax return.
Being that every debit(deposit) is a credit on the banks end, also a liability because it’s not their money , would we be able to deposit a negative check equaling our deposit to receive those funds?
Thanks for checking out our Debits and Credits Cheatsheet! No, you don’t enter a negative check to record. That’s logical, but QuickBooks doesn’t allow negative checks. The Make Deposit form is designed to do that.
In QuickBooks:
1. You enter a deposit of a payment from a customer who received your invoice by going to:
a. Customers Menu/Receive Payments, enter the Customer’s name, date of payments, payment amount, payment method and check #.
b. QuickBooks will automatically apply the payment to the first invoice matching the payment amount, or if no match, will apply is to the oldest invoice(s) until all the payment is applies. If that selection of invoices being paid is incorrect, uncheck the wrong ones and check the right ones. This should post the payment to Undeposited Funds
c. Then go to Banking menu/Make Deposits, A list of checks in Undeposited Funds (synonym for Checks in the Drawer) will come up and you select the check(s) you are depositing. Click OK to bring them into the Make Deposits window. Click Save when you’re done.
Debit Credit
Customer Invoice
Accounts Receivable 100.00
Sales 100.00
Customer Payment
Undeposited Funds 100.00
Accounts Receivable 100.00
Bank Deposit
Checking Account 100.00
Undeposited Funds 100.00