When I was teaching full-time, one of my students seemed to know what she was doing, yet when she handed in her first assignment every answer was wrong.

That didn't make sense, so when I reviewed it again, I realized actually everything was perfect, just all backwards.

I knew right away she must have worked at a bank. When I asked her, I was right. What does that have to do with anything?

When we own a business and are recording a deposit (or increase) to our bank account, it is considered a debit. While if you look at your bank statement, your deposits will show as credits.

Confusing? Yes!

We must remember the banks' books are based on the fact that they have YOUR money on loan (if you will), and it is due back to you anytime, a liability to them, so they record a deposit opposite to how we would.

Debits and Credits are confusing terms. When I'm teaching the basics I explain to my students / clients not to get too hung up on these words and instead think of them as increases and decreases.

The increases and decreases will vary so you should use a debit / credit chart until it becomes second nature (believe me, eventually it will).

There are five types of accounts

• Assets
• Liabilities
• Equity
• Revenue
• Expenses

Assets and Expenses are debit accounts, while Liabilities, Equity and Revenue are credit accounts. What does that mean? In a "normal" course of business, these are the normal balances for each account.

Again, I can't stress enough, how you should NOT get too hung up on the terminology. Once you know what type of account, then when it increases or decreases you can determine whether it is a debit or credit.

Still confused? You just need to practice! To do so, download the debit / credit chart before reading the next section.

Each transaction must have at least one debit and one credit, and the debits and credits must equal in value.
This is how double-entry bookkeeping works.

The History of Bookkeeping -

"Scholars have found records of debits and credits (the ABCs of bookkeeping) dating back to Italy in the 1300's. Following the dark ages, business in Europe boomed and it is believed that merchants began using the double-entry bookkeeping system--or something very close to it--to handle the volume and complexity of transactions.

Several systems were developed by mathematicians and businessmen to summarize and communicate business transactions, yet only one survived to become the standard system we use today."

Debits and credits are the bookkeeping terms used to express how an account is affected by a transaction. Based on the type of account affected, ie Asset, Liability, etc., and whether the account is increasing or decreasing, will determine if it is a debit or a credit.

When you increase an asset (ie bank account, inventory, Accounts Receivable) it is a debit, but when you increase a liability account (ie. Accounts Payable, Bank Loan) it is a credit.

Examples (to simplify, examples are without the GST)
Purchase for cash

• debit - Expense
• credit - Cash

Sale on account

• debit - Accounts Receivable
• credit - Revenue

Receipt of above

• debit - Bank
• credit - Accounts Receivable

To review the debit / credit chart and follow these and other examples ...

If you're doing your own books, after a typical week or month's worth of transactions, have a professional review your entries to ensure they are correct.

If so, then you are well on your way. If not, the corrections can be made and you can re-learn things properly before you get too far into it.

Are you ready?

What's all the fuss about, and why does year-end take so long to prepare for?
In the next issue we will:

• Offer tips to keep you on track throughout the year.
• Discuss accounts to pay particular attention to.
• Offer reasonable deadline dates.