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Background - Credit and Debit

Background  — Fri 18 Mar 2022

Credit en debit?

These terms are very old, yet they are still relevant. Numbers on the credit or debit side make the difference between whether they should be added or subtracted from something. Plus and minus, in other words. When double-entry accounting was invented 500 years ago, people were still counting with an abacus, the predecessor of the calculator and computer. On the abacus, you only added up numbers. Because the result was written down on the debit or credit side, you knew whether it was income or expenditure.

Although we can add and subtract just fine these days, especially with the help of computers, the use of credit and debit in accounting is still quite common. In fact, it has some advantages:

  • We have been doing it this way for over 500 years and it works just fine. Therefore, it is confusing for experienced entrepreneurs and professionals to stop doing it.
  • When you look up information, you find it everywhere. That means you can immediately start working with that information without having to convert it.
  • It is well-ordered and not easily overlooked. A small minus sign can escape your attention much easier.
  • It goes hand in hand with other pieces of accounting. This makes debtors and creditors also suddenly sound a lot more logical.

In Daxto, you hardly ever have to think about credit and debit because it's done for you fully automatically. The only exception is the memorandum, which you'll read about later. Still, it is helpful to understand these terms the best you can. Bookkeepers, accountants and information on the internet will often use these terms.

  • Credit: money comes in from the outside, into your business (income).
  • Debit: money goes from inside to outside, out of your business (expenses).

But of course there are snags again. For example, you should know that all financial accounts are seen in accounting as if they were outside your company. For a bank account or PayPal account, this is understandable. After all, that account is with the bank or PayPal and therefore outside your business. For a cash drawer or cash box, it sounds a little less logical. In any case, it is consistent. This is because it counts for everything under the heading "Cash and cash equivalents" (liquide middelen) on your balance sheet.

An example

The example below shows how credit and debit are applied. First, let's quickly sum up what happens in the example:

  • Entrepreneur Bart transfers € 100.00 from his own account to the business bank account.
  • Therefore, the amount appears as money received on the business bank statement.
  • Next, Bart has to process the transaction in his business accounting.

Everything on the balance sheet has to stay balanced. So if we do something on the left, we have to do something on the right. The bank account is on the left, because money in accounts is an asset of the company. This money can be used by the company to do something useful with. Bart's deposits are on the right, because it is a debt from the company to Bart. Debts are always on the right. Bart deposits this amount so that his company can start buying something, to later sell at a profit. This is how Bart makes a living. This is how business works.

Now Bart must therefore make the booking to properly process the deposit. A booking is just like a transaction in a bank account, money goes from A to B, but in your own accounts. The balance sheet, however, is special. On the balance sheet, it happens in two places at once, so everything stays balanced. To figure out what should be booked credit and what should be booked debit, you look on which side the category is on the balance sheet. This is how it works:

Assets (debit) Liabilities (credit)
Cash and cash equivalents (liquide middelen)
  Bank account: € 100.00.
Business assets (ondernemingsvermogen)
  Deposits Bart (Stortingen Bart): € 100.00.

The bank account is under Assets (Activa) and then Cash and cash equivalents (Liquide middelen). So on the left, on the debit side of the balance sheet. If you book an amount debit to a debit category, the amount increases (plus). Booking credit makes the amount decrease (minus).

Bart's deposits are under Liabilities (Passiva) and then Business Assets (ondernemingsvermogen). So on the right, on the credit side of the balance sheet. Booking an amount credit to a credit category increases (plus) the amount. Booking debit makes the amount decrease (minus).

The balance sheet above shows that there is € 100.00 in the business bank account. In addition, the balance sheet shows that this amount was deposited by Bart. The total of each side is € 100.00. This makes everything neatly balanced. Good job Bart.