Debits and Credits

Among the most confusing concepts to those who study accounting are the concepts of debits and credits. Students want to think that a debit is always subtracted from an account balance and that a credit is always added to an account. Neither of these beliefs is true. Gaining an understanding of how debits and credits work is fundamental to the understanding of double-entry bookkeeping. Double-entry bookkeeping has been in existence for centuries. In fact, Luca Pacioli is credited with writing the first text that describes double-entry bookkeeping in 1494.

One of the key elements to double-entry bookkeeping is that it provides a method to verify that entries have been recorded correctly and are “in balance.” For example, each entry must have one or more debits that are offset by one or more credits. At the end of an accounting period the debits and credits are totaled, to be sure that the books are in balance. If not, the hunt is on to find the entries that have been made in error.

Although we have computers today that quickly add the totals for our ledgers and help us balance our accounts, you can imagine how important the use of debits and credits were through all the years that books were kept manually. This provided a built-in system of checks and balances that helped assure accuracy and helped people understand whether they were making a profit.

In prior years, those who studied accounting were often given a “practice set.” This set included a set of journals, ledgers, subsidiary ledgers, invoices, checks, billings, purchases, and payroll. The student then recorded each transaction by hand in the ledgers and generated a “trial balance” by hand. Unless the student understood the correct way to record each transaction with debits and credits, the trial balance would not balance and the student would have to figure out where the error was and correct it. After the trial balance was correct, the student would generate financial reports.

Although students today might now practice recording transactions on computers instead of by hand, some understanding is lost when a software program automatically records transactions and the student does not understand why. There is value in taking an accounting course on debits and credits.

Some free online courses about debits and credits are available. Most are from sites that are advertising other courses or services. Any bookkeeping course will explain debits and credits in detail. Technical and business colleges offer courses on bookkeeping that will explain the proper ways to record transactions using debits and credits. The basic accounting courses that are offered by business colleges in universities will provide a good understanding of debits and credits for those majoring in business or accounting. This basic accounting course is usually required for those seeking a bachelor’s degree in business or accounting.

For non-financial managers and executives it can be worthwhile to take a course like that offered by the American Management Association (AMA). This accounting course is listed on the AMA website and is entitled “Debits and Credits: How Accounting Really Works.” The course is intended to help managers make more informed decisions and to save money, to understand how and when sales and expenses are recorded, and to understand basic accounting processes. The course also covers how transactions are entered into financial records and what to expect in month-end closings. This accounting course is two days long and costs $1,995 for non-members, and $1,795 for members. The classes are scheduled at various times in major cities across the United States, including Chicago, San Francisco, New York, and Atlanta.