When you get a message that says - "your account has been debited". What does it exactly mean? Why does your accountants always mention credits and debits? Why cant they just use simple language.
The truth is using the terms debits and credits are the simplest way to communicate the details/nuances of a transaction. Its the common language that when stated correctly and read by a person who understands it, its processed uniformly by everyone who understands its. Its like code for developers. If you know how to read code, you understand the full details as opposed to someone who is reading a supporting flowchart. Granted it requires you to understand what debit and credit means, but if you know it, you can be ultra specific.
What is debit and credit anyway
They dont really mean anything. They just used to represent left and right respectively of the accounting equation.
- debit means left
- credit means right
If you re-arrange the accounting equation so as to remove subtractions, the accounting equation looks like this:
Assets + Expenses + Owner's Draws = Liabilities + Owner's Capital + Revenues
If you increase something on the left side of the equation, you debit the entry. If you increase something on the right side of the equation, you credit the entry.
e.g. you made a sale of $100 and collected the cash immediately
Cash (an asset) increased by $100 and Revenue recorded increased by $100. Cash is an asset on the left of the equation - so we pass a debit entry. Revenue is on the right of the equation, and it increased so we pass a credit entry.
e.g. You paid for an expense in cash.
Expense increased. Cash (an asset decreased). Expense is debited(left of equation and it increased) and asset is credited(left of equation but reduced.)
Thats it, debit just means left and credit means right. Your finance team is trained to enter the data correctly. As a founder if you get this, then reading financial statements become super simple. You can easily figure out if you are supposed to look at the credit entries or debit entries associated with an account.
Learn more about the accounting equation here - Accounting equation - A founder's perspective
