When you considered becoming your own boss, you probably didn’t think you’d learn a whole new language just to do it. But accounting terms are some things most business owners will need to get used to.
Two of the most common accounting terms (debits and credits) are explained below to help you understand how they work in business.
Changes in asset accounts
The things your company owns in business, such as cash, cash equivalents, furniture, equipment, machinery, and land, are assets. List each category of account and keep running totals for your balance so you can report them on the Balance Sheet. Assets have a debit balance. To record an increase in this account, enter the amount as a debit in your journal. A corresponding credit is entered to show a decrease in the balance of an asset.
Changes in liability accounts
The total outstanding debt that a business owes its suppliers is called a liability. These are debts that can be categorized as short-term or long-term. To show an increase in liabilities, enter a credit in your journal. Since payments are made to decrease the balance, you can show this by entering a debit to the Liability account.
Changes in capital accounts
Equity is the value of your business to its owners and stakeholders. Capital accounts have a credit balance. When you reinvest earnings or inject additional funds from the owners, the account is increased with a credit entry on its books. To reduce the balance, record a debit to the Equidad account.
Changes in income accounts
All sources of income your business earns or receives are considered Revenue. These accounts have a credit balance and are increased by entering the amount as a credit transaction in your journal. A reduction in income is done by creating a debit to the income account. Sales and donations are examples of income.
Changes in expense accounts
Expenses are the costs you incur in running your business. They are reported in the Income Statement and have a debit balance in the ledger. To show a change to these accounts, enter a debit to reflect a balance increase and a credit when payments are made to decrease the balance. Some examples of expenses are advertising, insurance, payroll, and rent.
This is a basic introduction to accounting, debits and credits. For more information on small business accounting and how account balances are shown on financial reports, visit www.tbsusa.com.
