Debits & Credits

Double Entry Accounting System
What are Debits & Credits?

The primary function of debits & credits is to show a flow of money or value from one account to another.

How They Work

Suppose you were keeping the accounting records for a retail store that had just opened.

You could attempt to keep those records by simply recording the business’s sales and costs.
The problem is a business may make many transactions during an accounting period.​
While it is easy to record transactions with a simple system, it is very difficult to check them reliably.
If only some of these transactions are incorrect, your period-end  accounting records will be unreliable and totally useless.
The Double Entry Accounting System

To overcome this problem, businesses use the double-entry accounting system.

​This system wasn’t designed to make recording simple.
Instead, it was designed with checking in mind.
With the double-entry system, you still record sales and costs.
By using a double entry, however, you record a duplicate record of those transactions in other accounts, as well.
This duplicate record is in a convenient format for checking.
It allows for fast, easy, and reliable checking against the records of other businesses.
By checking these accounts alone, you can make sure your entire record of sales and costs is correct.

© R.J. Hickman 2020