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What are charges and credits?
Charges and credits are terms utilized by clerks and bookkeepers when recording exchanges in the bookkeeping records. The sum in each exchange should be entered in one record as a charge (left half of the record) and in another record as a credit (right half of the record). This twofold section framework gives precision in the bookkeeping records and budget summaries.
The underlying test is understanding which record will have the charge section and which record will have the credit passage. Before we clarify and delineate the charges and credits in bookkeeping and accounting, we will talk about the records in which the charges and credits will be entered or posted.
What Is An Account?
To keep a company’s financial data organized, accountants developed a system that sorts transactions into records called accounts. When a company’s accounting system is set up, the accounts most likely to be affected by the company’s transactions are identified and listed out. This list is referred to as the company’s chart of accounts. Depending on the size of a company and the complexity of its business operations, the chart of accounts may list as few as thirty accounts or as many as thousands. A company has the flexibility of tailoring its chart of accounts to best meet its needs.
Within the chart of accounts the balance sheet accounts are listed first, followed by the income statement accounts. In other words, the accounts are organized in the chart of accounts as follows:
- Owner’s (Stockholders’) Equity
- Revenues or Income
Twofold Entry Accounting
Since each deal influences in any event two records, our bookkeeping framework is known as a twofold passage framework. (You can allude to the organization’s graph of records to choose the appropriate records. Records might be added to the diagram of records when a fitting record can’t be found.)
For instance, when an organization acquires $1,000 from a bank, the exchange will influence the organization’s Cash account and the organization’s Notes Payable record. At the point when the organization reimburses the bank credit, the Cash account and the Notes Payable record are additionally included.
On the off chance that an organization purchases supplies for cash, its Supplies record and its Cash record will be influenced. In the event that the organization purchases supplies using a loan, the records included are Supplies and Accounts Payable.
On the off chance that an organization pays the lease for the current month, Rent Expense and Cash are the two records included. In the event that an organization offers a support and gives the customer 30 days wherein to pay, the organization’s Service Revenues record and Accounts Receivable are influenced.
Albeit the framework is alluded to as twofold section, an exchange may include multiple records. An illustration of an exchange that includes three records is an organization’s advance installment to its bank of $300. This exchange will include the accompanying records: Cash, Notes Payable, and Interest Expense.
(On the off chance that you use bookkeeping programming you may not really see that at least two records are being influenced because of the easy to understand nature of the product. For instance, suppose that you compose an organization check through your bookkeeping programming. Your product naturally lessens your Cash record and prompts you just for different records influenced.)
Debits and Credits
After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account.
To debit an account means to enter an amount on the left side of the account. To credit an account means to enter an amount on the right side of an account.
Generally these types of accounts are increased with a debit:
You might think of D – E – A – L when recalling the accounts that are increased with a debit.
Generally the following types of accounts are increased with a credit:
Stockholders’ (Owner’s) Equity
You might think of G – I – R – L – S when recalling the accounts that are increased with a credit.
To decrease an account you do the opposite of what was done to increase the account. For example, an asset account is increased with a debit. Therefore it is decreased with a credit.
The abbreviation for debit is dr. and the abbreviation for credit is cr.