Now you may be wondering why your bank statements say the exact opposite to what your accounts say when it comes to DEBIT and CREDIT transactions, in fact, all transactions will be the opposite from the information the bank gives to you.

This is because the bank statements you receive are from their point of view – not yours. Whoever knew a bank would be self-centered?

The reason this is the opposite to yours is that if you have a DEBIT card bank account with them this is money they owe to you whereas a CREDIT card will be money you owe them. Your asset is their liability, equal and opposite.

However, these are your accounts and you want to portray them from your point of view.

So how does this work in practice?

The profit and loss account and the balance sheet work in harmony in double entry accounting. A DEBIT in one will be a CREDIT in another.

In fact, you may even notice if you put both financial reports side by side, they are complete opposites.

Understanding debits and credits

Why might I need to know this?

Generally most systems do these majority of these entries automatically for you; however, you want to be able to understand if something doesn’t quite look right and what could be causing it to look different.

This is also so that you can understand any journals, transactions, invoices, credit notes or adjustments in your accounts. Which can be especially useful if you have more than 1 person creating entries. That way you can look for anything which looks abnormal more but more importantly, it means you can understand how to go about fixing it.

This is the basic concept for how accountants and bookkeepers make adjusting journals – allowing them to accrue and prepay costs across your accounts so that your income matches your expenses.

If you understand the basics of DEBITS and CREDITS you understand much more about accounting than you might have originally thought.