Debits vs. Credits
Debits and credits are two terms most often used in accounting, but you might run into them in real life as well. It is to your advantage to understand what they mean.
A debit increases assets and a credit increases liabilities. An asset is something you own that has a monetary value. If your parents own a house, that house is an asset. A liability is a debt. If your parents owe money on a car, that amount owed on the car is a liability.
Let’s look at it with a savings account. If you add $100 to your account, your account is debited $100 because you are increasing the asset, cash. If you pay a $100 bill with a check, your account is credited $100 because you are in debt the $100.
Of course, if you already had $100 in your account, you aren’t actually in debt. Keep in mind that debits and credits are constantly balancing each other out.
In bookkeeping and accounting, when you debit one account, you must credit another. For example, if you sell something and make $1,000, you must debit cash and credit sales. Accounts can be confusing, but just remember, that debits increase value and credit increased debt.
If you own a business, debits and credits are very important. You must keep your books in order to make sure that you pay the right people and get what you deserve. If you are going into business, you will have to know this inside and out.
If you are just an ordinary person who wants to be mindful of their money, there may be more important things to be a master of, but knowing what debits and credits are can be useful. Just remember, debits add to assets and credits add to liabilities.
