Meaning of Debit and Credit
A look at the account statement shows us debits and credits on a daily basis. It is reassuring when there is more on the credit side than on the debit side, because then the account shows a plus.
But if debits and credits are used in bookkeeping, then these terms have a completely different meaning. Everyone who learns bookkeeping knows the saying “you should have”! – because here should not be the minus and not have the plus.
The definition & the difference between debit and credit
- SHOULD in the bookkeeping = assets such as cash and bank assets
- HAVE in the accounts = liabilities like loans and debts
In the real sense, behind these two terms SHOULD and HAVE is the complete secret of bookkeeping, or at least almost. But many still find it difficult to deal with these two.
The first rule is: Shouldn’t equate with “should” and have not with the verb “have”!
It is precisely this mistake that most people who deal with bookkeeping for the first time make and are then confused when it comes to the formation of the accounting records.
Therefore, everyone should remember: Of the two terms SHOULD and HABEN, only the two account pages are used in bookkeeping and accounting. The fact that the two words are similar to the German verbs in terms of sound has nothing to do with their actual meaning.
The left side of an account is called “SHOULD” and the right side is always “HAVE”. It doesn’t matter what type of account it is, this applies to all accounts!
The posting record
Every business transaction by a company is recorded or recorded within the framework of financial accounting. These can be many different operations, such as buying goods on account. Here, the payment of the invoice can be posted at a later point in time in a new, independent process.
A business transaction is always expressed using the so-called booking record and this basically addresses two booking accounts. This means that each booking record is built up according to the same scheme: debit to credit.
- The first account is always addressed on the left, i.e. the TARGET page
- The identical amount then appears on the second account on the right, i.e. the HAVE side.
The booking rate for the above example is as follows:
- Incoming goods to liabilities and that with a value of 1000 euros.
This means that 1000 euros are posted on the left side of the goods receipt account and the resulting payable is then entered on the right side of the payables account.
This example is a very simple booking record, because it could also be split in the next step. In this case, two accounts are addressed on one side and only one on the other.
When is the TARGET page and when is the HAVE page used?
The question now arises as to which account is being addressed. Basically a lot of questions arise when making a booking for the first time.
There is good support from the existing accounts for financial accounting , such as accounts 0 to 3. These are the systematic registers of all accounts. It is an advantage if all important and common accounts are marked with a highlighter, as this avoids long searches.
If the booking rate is known, then a decision must be made whether the accounts should change in the SOLL or in the HABEN. That depends on the type of account. A distinction must be made here:
- Inventory accounts: they change assets and capital
- Success accounts: Here the expenses and income are taken into account.
All accounts in the balance sheet belong to the stock accounts , whereby a distinction must be made between the active and passive accounts:
- Active accounts
- For example, fixed assets such as cars, office equipment, bank balances and cash registers. This also includes trade receivables.
- The accesses are in the TARGET of the account
- Disposals are posted in HABEN
- The passive accounts
- For example, loans, payables to suppliers and equity
- Entries are posted in HABEN
- The departures are noted in the TARGET
The profit accounts show the movements that will later be used to determine the operating result , ie the profit or loss of the company. But here, too, there is a subdivision that must be observed:
- For example, interest income and sales
- They increase the result and thus the equity
- These are booked on the HAVE page
- In TARGET the losses as are credits entered
- For example wages / salaries, running vehicle costs
- This reduces the operating result and at the same time also the equity
- Therefore, expenses are posted in the TARGET
- If bonuses, discounts and rebates are granted, then these reduce the effort and for this reason appear on the HAVE page.
An explanatory example:
Ms. Vogelsang runs an online shop. She buys goods and then sells them to her customers. Customers must settle the invoice received within 7 days via bank transfer. The following business transactions occur in January of the current financial year:
- The customer honestly orders goods worth 250 euros. The posting record is: Receivables from sales revenues 250 euros.
- It concerns sales revenue for Ms. Vogelsang
- The sales revenue account is an income account and increases in credit
- But first of all, Ms. Vogelsang has a claim against Mr. Ehrlich
- The accounts receivable is an asset account and therefore increases in debit.
- The goods will be paid for later. The booking rate is: Bank to receivables 250 euros
- The incoming payment is reduced by Ms. Vogelsang’s request
- The accounts receivable is an asset account that is reduced in HABEN
- At the same time, the number of banks increases.
- The bank account is an asset account and this increases in the target.
- Ms. Vogelsang withdraws 100 euros in cash from the account and puts it in the cash register. The booking rate is: cash at bank 100 euros
- Here, the cash register and bank are active accounts.
- The increase in the cash balance is posted in the TARGET.
- The withdrawal represents a reduction by the bank and is therefore posted in HABEN.
- Ms. Vogelsang pays office supplies worth 15.45 euros from the cash register. The booking rate is: Office supplies at the cash desk 15.45 euros.
- Here the office supplies represent an expense for the company.
- This effort is posted in the TARGET.
- The cash register is an active account and this is always reduced in HABEN.
One could move on to many other business transactions in the same way. In order to be able to understand how the individual actions were posted, the documents should always be assigned the appropriate account assignment . To do this, simply write down both accounts of the posting record on the receipt. First, the account booked in the SOLL is written down, then a slash is placed and then the HABEN account is listed.