This post was last updated on March 25th, 2021 at 09:56 am.
Let’s first say that IconCMO can help you with knowing when to use debit or credit during a journal entry. To check out how IconCMO can help — check out a free trial.
Most of us have used a debit card. And when we do, the amount of money in our bank account is reduced. When we return items, the store tells us they have credited our account. Using these examples the answer to the question above would be a definite, “YES”, debit does mean minus and credit means plus. However, this isn’t always the case. So how do you sort out what debits and credits mean for your accounting?
There are 4 main account types
Assets hold the money. These are your bank accounts, investment accounts, cash, equipment or property you own.
Liabilities show debt owed. These are your loans, mortgages, credit cards, payroll taxes….
Expenses show how the money in your asset account was spent. This can be office supplies, salaries, utilities, rent or any other operating expense.
Revenues show how the money in your asset account was earned. This can be donations, rental, fees, fundraising and more.
Debits and credits affect each of these accounts differently. Assets and expenses have a normal debit balance while liabilities and revenues have a normal credit balance.
Here’s a quick visual summary.
What does a “Normal Balance” mean when it comes to debits and credits?
Normal balance is a double entry accounting term that describes how an account is increased. Debits increase asset and expense accounts while credits increase liability and revenue accounts.
Still wondering why your bank calls it a debit card?
Your checking account is an asset to you; however, it is a liability to the bank. When you deposit money, it is increasing the amount of money they OWE you and liabilities have a normal credit balance. When you use your debit card you are lowering the amount of money the bank owes you and decreasing their liability. That’s why their use of debits and credits is the opposite of what yours is when you’re doing bookkeeping for your own organization.
How are you supposed to remember all that debit and credit stuff?
One of the benefits of using IconCMO fund accounting software is the plus and minus signs change depending on the account you select. This helps to assure you are increasing or decreasing the account appropriately as you choose between debits and credits. Remember when using double entry accounting, every financial transaction must use at least 2 accounts and debits must always equal credits. A good accounting system like IconCMO won’t let you post a transaction until debits and credits are equal.
Click here for more fund accounting tips.
To find out more about how debits and credits relate to gains and losses (revenues and expenses), see this article from the Accounting Coach.
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I never thought about how your checking account is a balance of how much your bank owes you and your debit card takes out of that each time. This is such a nice and simple way for me to teach my kids about debit and credit cards. My son needs to get one soon so I’ll help him get a debit card and a checking account.