Why Are Debits and Credits Important?ĭebits and credits keep a company’s books in balance. For example, assets have a natural debit balance because that type of account increases with a debit. As such, accounts are said to have a natural, or natural positive credit/debit balance, credit or debit balance based on which one increases the account. Conversely, credits increase liability, equity, gains and revenue accounts, while debits decrease them. If, instead, it pays for the computer with cash at the time of purchase, it would debit and credit two types of asset accounts: debit for equipment and credit for cash.ĭrilling down, debits increase asset, loss and expense accounts, while credits decrease them. For example, if a business purchases a new computer for $1,200 on credit, it would record $1,200 as a debit in its account for equipment (an asset) and $1,200 as a credit in its accounts payable account (a liability). Debits and credits are both opposite and equal (though each line debit/credit doesn’t necessarily have an equal counterpart), occur simultaneously and represent a transfer of value. ![]() In double-entry accounting, every transaction is recorded with a debit and credit in two or more accounts, which categorize different types of financial activities in a company’s general ledger.
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