Debits & Credits

Definition

Debits and credits are the two sides of a transaction in double-entry bookkeeping. A debit is an entry on the left side of an account, and a credit is an entry on the right side of an account. Debits and credits are used to record financial transactions in the accounting system.

Example

For example, when a company purchases inventory, the company will debit the inventory account and credit the cash account. This means that the inventory account will be increased by the amount of the purchase, and the cash account will be decreased by the same amount.

Why it Matters

Debits and credits are important for keeping accurate records of financial transactions. By recording transactions in this way, it is easier to track the flow of money in and out of the business. This helps to ensure that the company's financial statements are accurate and up to date. Additionally, debits and credits are used to calculate the company's net income or loss. By understanding how debits and credits work, accounting professionals can ensure that the company's financial statements are accurate and up to date.