Basic Accounting Debits and Credits
Great start you've completed part 1 of 3
"for every action there is always an equal and opposite reaction"
Sir Isaac Newton
Double-entry bookkeeping is bread and butter work for a Fund Administrator or anyone working in accounting. A solid understanding of debits and credits will help other aspects of accounting fall into place.
Today's Funds Administration accounting software makes it possible to stumble your way through without having a sound knowledge of manual double-entry bookkeeping.
Junior staff can often find themselves being shown 'how' to book an entry and only fully understand the 'why' after they've managed to piece together the bigger picture. This 'learning in reverse' process is not very efficient and this lesson, along with practical examples, aims to give a solid grounding to anyone who wants to understand how to book journal entries.
Debits and credits are a system used in bookkeeping to determine how to record any financial transaction. In accounting "Dr" (Debit) means left side of a ledger account and "Cr" (Credit) is the right side of a ledger account.
Practically everyone has trouble with the rules of debits and credits. The rules aren't very intuitive so don't be put off if you don't get it at first. The rest of this lesson should help you understand and also provides some memory tricks to help recall the correct postings.
To figure out whether to debit or credit a specific account you can use the modern accounting equation approach. Central to this is the following equation:
Assets = Liabilities + Owner's Equity
When you book a transaction to the General Journal you must always maintain the balance above. For every transaction booked there are two entries made i.e. double-entry bookkeeping.
There are five general categories that all accounts can be grouped into. Depending on which category the account you are posting to falls into determines whether you need to debit or credit when booking the journal entry.
Here are the 5 basic types of accounts:
- Assets: e.g. cash, holdings, equipment or receivables (money owed to you)
- Liabilities: e.g. expense payables, taxes due, payables (money owed by you) and borrowed money
- Equity: e.g. common stock and retained earnings
- Revenues: e.g. interest, dividends and income
- Expenses: e.g. professional fees, commission and interest on borrowed money
So for example when booking a Legal Fee Expense payment to the General Journal you know you want to reduce Cash and increase Legal Fee Expense but are unsure which account to debit and credit. We know that Cash is an 'Asset' and Legal Fee Expense comes under 'Expense'.
Using the below table you can see to reduce Cash credit the Cash account and to increase the Legal Fee Expense you debit the Legal Fee Expense account.
| Debit | Type of A/C | Credit |
|---|---|---|
| Increase | Assets | Decrease |
| Decrease | Liabilities | Increase |
| Decrease | Equity | Increase |
| Decrease | Revenue | Increase |
| Increase | Expenses | Decrease |
Some practical examples of Fund Administration journal entries
Bank Fee expense payment:Dr: Bank Fee expense (Expense)
Cr: Cash (Asset)
Subscription:
Dr: Cash (Asset)
Cr: Contributions (Equity)
Interest receipt:
Dr: Cash (Asset)
Cr: Interest receipt (Revenue)
Here's a short 1 minute video for remembering which accounts to debit or credit
- what is double entry bookkeeping
- the 5 types of accounts
- when to debit and credit for journal entries
- practical examples of journal entries
- memory trick for recalling the correct entries
Good work, now test what you've learned below! Completed part 2 of 3
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