Debit & Credit Conundrum

Anyone that has not had an Accounting 101 class will most likely be confused by the concept of Debits (Db) and Credits (Cr). These are nothing like Debit and Credit cards (which is what I thought originally…), but are the ying/yang behind how all of your accounts work together. The picture below is a basic visual for how Debits and Credits balance each other.

Debits and Credits will always balance each other perfectly. When something is added to one side, the same amount must be added to the other. Let’s take a look at an example:

Example 1: You’ve just been given a check for $500.00 from a donor for your organization. Since that is an Income situation, there will be a Credit (Cr) for 500, and now we have to balance it on the Debit (Db) side. Since it’s money being added to your account, it’s going to increase your Cash account which is an Asset. So, that $500 will be entered as Db 500 to Assets and Cr 500 to Income.

Example 2: You’ve just made a purchase for your office, a new computer costing $1,500. Since you’ve increased an expense account by adding a transaction, you’ll Db the expense account for the $1,500. Now for Cr. Since you spent money for the computer, your Cash account is going to decrease. Therefore, the Cr will be 1,500 for your Asset account.

Make sense? It’s going to take some getting used to, but once you’re able to visualize the chart above everything will become easier. Fortunately Aplos takes care of all of these entries through a very simple interface so you’ll almost never have to worry about entering Db and Cr columns… however… We do have our Journal Entry screen that allows you to do these types of transactions. When would you need to use Journal Entry? Let’s take a look.

Example 3: Your organization has just been approved for a loan to buy land. Let’s say the loan was for $10,000. Loans are money that you “own” but need to eventually pay back, which makes them a Liability. So, you would Cr your Liability account for the 10,000 received. Now to balance! Since you’ve just received a loan, that is money coming into your organization, which means a Db to your Asset account. Which Asset account depends on how the loan was/is spent. Since you’re recording the purchase of an Asset that does not affect your organizations Cash balance, choose (or create) a Land account in your Fixed Assets group. If you bought a building with the loan, you would enter the amount the building is worth as a Fixed Asset, and so on and so forth.

For the most part you probably won’t use Journal Entry very often… But just remember that in accounting, every transaction you record is a journal entry at heart, using this Debit and Credit system. You’re just lucky enough to have a software that makes it extremely simple for you. Plus, our professional services are free, so you can always reach out if you need assistance!