Utilized in bookkeeping and accounting, credits and debits are key parts of the double entry system, which refers to a method of recording transactions that affects two accounts or more. Here are five tips for recording credits and debits:
- For every credit entry, a separate account must receive a debit entry of an equal amount.
- Use a T-account to illustrate the credit and debit effect on account balances.
- Expense accounts are usually debited. For example, a firm debits rent expense when it pays rent. It debits advertising expense if it runs an advertisement in the newspaper.
- Revenue accounts are nearly always credited. When a retailer sells a shirt, it credits sales. If a bank realizes interest on a loan, loan interest revenues gets credited.
- Assets and liabilities have both credit and debit entries. However, assets normally have debit balances, while liabilities usually have credit balances.