Understanding Total Credits vs Total Debits in Double-Entry Accounting

Welcome to this simple and visual guide on understanding total credits vs total debits in double-entry accounting. Whether you're a beginner or looking to refresh your knowledge, this article will provide you with a comprehensive understanding of this fundamental concept.

What is a debit and what is a credit?

In accounting, debits and credits are used to record financial transactions. A debit is an entry that increases an asset or expense account, or decreases a liability or equity account. On the other hand, a credit is an entry that increases a liability or equity account, or decreases an asset or expense account.

How are debits and credits recorded?

Debits and credits are recorded using a system called double-entry accounting. This system ensures that every transaction is recorded in at least two accounts, with one debit entry and one credit entry. This ensures that the accounting equation, which states that assets must equal liabilities plus equity, remains balanced.

Types of entry methods for recording transactions

There are several entry methods for recording transactions, including:

• Journal Entries: Transactions are initially recorded in a journal, which serves as a chronological record of all financial transactions.
• General Ledger: Journal entries are then posted to the general ledger, which contains separate accounts for each asset, liability, equity, revenue, and expense.
• T-Accounts: T-accounts are a visual representation of accounts, with debits on the left side and credits on the right side.

Debits and credits in action

To better understand how debits and credits work, let's look at a few examples:

Example 1: Sales Revenue

When a business makes a sale, the revenue account is credited, increasing the total credits. At the same time, the accounts receivable or cash account is debited, increasing the total debits.

Example 2: Fixed Asset Purchase

When a business purchases a fixed asset, such as a building, the fixed asset account is debited, increasing the total debits. At the same time, the accounts payable or cash account is credited, increasing the total credits.

Example 3: Getting a Loan

When a business takes out a loan, the cash account is credited, increasing the total credits. At the same time, the loan payable account is debited, increasing the total debits.

Example 4: Loan Repayment

When a business repays a loan, the loan payable account is credited, increasing the total credits. At the same time, the cash account is debited, increasing the total debits.

How debits and credits affect liability accounts

In double-entry accounting, liability accounts are affected differently by debits and credits:

• Debits increase the balance of liability accounts.
• Credits decrease the balance of liability accounts.

How debits and credits affect equity accounts

Equity accounts, such as owner's equity and retained earnings, are affected differently by debits and credits:

• Debits decrease the balance of equity accounts.
• Credits increase the balance of equity accounts.

Debits and credits chart

Here is a chart summarizing the effects of debits and credits on different types of accounts:

Total credits vs total debits

Now that we understand how individual transactions are recorded, let's explore the concept of total credits vs total debits.

In double-entry accounting, the total debits must always equal the total credits. This principle ensures that the accounting equation remains balanced. If the total debits do not equal the total credits, there is an error in the recording of transactions.

Conclusion

Understanding total credits vs total debits is essential for maintaining accurate financial records. By following the principles of double-entry accounting and ensuring that the total debits always equal the total credits, businesses can track their financial transactions and maintain the balance in their books.

Remember, debits increase asset and expense accounts or decrease liability and equity accounts, while credits increase liability and equity accounts or decrease asset and expense accounts. By mastering this fundamental concept, you'll have a solid foundation in double-entry accounting.