Learning accounting basics is no easy task for small business owners. Whether you’re running your own eCommerce business or a brick-and-mortar shop, you’ve likely tripped up over overwhelming accounting jargon like accounting debits and credits.
However, don’t leave this on the back burner.
Learning the basics of accounting debits and credits is critical to fully understand your financial picture, which in turn, affects key decision making.
So, let’s walk through the process.
Getting to know the basics of accounting debits and credits
Debits and credits outside of the accounting world can be used to understand the foundations of accounting as well. In the real world, we spend money directly from our checking account (debit cards) and use money from our line of credit (credit cards).
In this sense, debits are seen as money drawn from our bank account, while the credits are viewed as money available to spend or borrow from the bank. This means that debits record the money flowing into an account while credits record the money flowing out of an account.
Business transactions directly impact the financial statements of your business. When accounting for these transactions, they affect a minimum of two accounts. Hence, the term double-entry system. A simple way to think of debits and credits is that they are equal, but form opposite entries in your books.
A simple ‘cheat sheet’ to understanding the difference between debits vs. credits can go a long way.
- Debits increase as credits decrease
- Record on the left side of an account
- Debits increase asset and expense accounts
- Debits decrease liability, equity, and revenue accounts
- Credits increase as debits decrease
- Record on the right side of an account
- Credits increase liability, equity, and revenue accounts
- Credits decrease asset and expense accounts
What kind of debit and credit accounts are there?
If you’re running an eCommerce website, you probably have transactions happen regularly. These transactions will be entered into various accounts as you do your bookkeeping. As an example, five common accounts include:
- Assets — these are resources owned by your business which have economic value that you can convert into cash (i.e. land, cash, vehicles, office equipment)
- Expenses — these are costs that occur during business operations (i.e. think wages and supplies)
- Liabilities — these are amounts owed to another person or business (i.e. think accounts payable)
- Equity — these are your assets minus your liabilities
- Revenue — these are cash earned from your business sales
How accounting debits and credits operate
So you operate your eCommerce business out of your home office. You’re on the hunt for a new, stand up desk because you want to get moving a bit more.
You order a desk off Amazon, and the total comes to $500.
In this scenario: you credit your cash account $500 (credit = decreases), because money is flowing out of it. But it’s important to note that another account changes during this process.
Your assets account, which represents the total value of all the furniture your business owns, increases. Liability accounts on the other hand, keep track of what you owe.
Too overwhelming? Try Kashoo’s accounting software
Understanding accounting debits and credits can be overwhelming, but it doesn’t have to be. If you want to automate the double-entry system, Kashoo’s accounting software does it for you. (Yes, we automatically debit and credit your accounts with every transaction so you don’t have to) — giving you and your business peace of mind.
Interested? Try Kashoo for free today using our 14-day free trial to see how we can uncomplicate basic eCommerce accounting debits and credits for you.