Debits and Credits, WTAF are you talking about?

I learnt long ago not to discuss the debit and credits with my clients as the look on their faces would always be a look of absolute boredom (eyes glazing over while they think of what they can say to end this torturous conversation) and a hint of aggression (a build-up of frustration, of not caring what a debit is and why I need to figure out the other leg, what or where is this leg??)

However, this is a principle that can be taught with a few tips and tricks that can simplify this greatly, and when done in the past I could see some excitement from clients as they finally got what all their accountants have been blabbering on about.

First off, you do need to be able to categorize between income, liability, assets and expense; these terms are explained in our “Business Accounting Terms to Know” article.

Secondly, just as every action has a reaction, every debit must have a credit. When we wonderful accountants start referencing the other leg, we are actually asking “what is the credit for this debit?”.

Thirdly, if you are still with me, I have some exciting news, here comes the cheat sheet:

Let us now look at a few examples and implement these 3 steps:

Company ABC receives R100,000 from XYZ Bank as a loan:

Step 1: The money is in the bank account of ABC, the bank account is an asset.

Step 2: The money is received from XYZ Bank as a loan, the other leg is thus a liability.

Step 3: Money in the bank is an increase in assets (Bank balance gets bigger), thus debit. The other leg is an increase in liabilities (ABC now has an extra R100,000 that they owe), thus Credit.

Journal:               Debit     ABC Bank account            R100,000

                               Credit   XYZ Loan                                           R100,000

Company ABC invoices their client DEF for services rendered of R10,000:

Step 1: The client is a customer of ABC and as such is an asset.

Step 2: The invoice is raised for services, thus creates an income.

Step 3: The customer being invoiced will lead to their balance owed getting bigger, this is thus an increase in assets, which means you debit. The income will get more when invoicing, thus credit.

Journal:               Debit     Customer DEF    R10,000

                              Credit    Income                               R10,000

Shareholder A purchases stationery of R100 for company ABC using her own personal money:

Step 1: Stationery purchased will be an expense for the business.

Step 2: Stationery purchased from Shareholder A’s personal money will mean that ABC now owes shareholder A for that money, this is thus a liability.

Step 3: Stationery being purchased will increase the stationery expense, thus debit. Shareholder A will now be owed R100 more by Company ABC, thus increasing the liabilities, leading to the credit.

Journal:               Debit     Printing and Stationery   R100

                              Credit    Shareholder’s loan                         R100

It is also worth mentioning that in understanding the concept of journals and how the different categories are affected also translates into a better understanding of reading your financial statements.