I spent months of my life staring blankly at accountants trying to understand why income was a credit, but a bank account with lots of money in it was a debit. Then I came across:
DEAD CLIC AND THE GOLDEN RULE -
Debits increase Expenditure, Assets, Dividends(and credits decrease them)
Credits increase Liabilities, Income. Capital (and debits decrease them)
and the Golden Rule - Don't worry too much about why - double entry, like surfing, is one of those things which is much easier to explain in practice than in theory.
EXAMPLE 1 Invoice a customer £500
Debit Trade Debtors £500 (since increasing an Asset)
Credit Income £500 (since increasingIncome)
EXAMPLE 2 Customer pays the £500 invoice
Debit Bank £500 (since increasing an Asset)
Credit Trade Debtors £500 (since decreasing an Asset)
EXAMPLE 3 Sell computer with cost of £500 and accumulated depreciation of £200 for £100 + £20 VAT
First: We make a loss on disposal of £500 - £200 - £100 = £200 on this transaction.
Credit Fixed Asset Cost £500 (since decreasing an Asset)
Debit Asset depreciation £200 (since decreasing a Liabilty)
Debit Trade Debtors £120 (since increasing and Asset)
Credit VAT Control £20 (since increasing a Liability)
Debit Loss on Disposal Account £200 (since increasing an Expense)
Double Entry Bookkeeping Frequently Asked Questions
So is a debit bad or good?
It depends on what is being debited! We need to distinguish between two different types of account
- Balance sheet accounts assets and liabilities such as bank and overdraft balances
- Debits are assets (good), credits are liabilities (bad)
- Profit and loss accounts Income and expenditure
- Debits are expenditure (bad), credits are income (good).
How does double entry work on Clear Books?
Most of the double entry goes on behind the scenes so when you explain a bank payment against a bill, it will debit trade creditors and credit the bank without troubling you unduly about the technicalities.
You can directly enter double entry transactions using Tools > Journals.
Why does money into bank statements show up as a credit on my statement and a debit on your system
The banks give you their statement. What is a debit for you is a credit for them. And vice versa.
Want to know more?
Check out our overview for a more technical perspective on double entry accounting.