Credits and debits are often seen as income and expenses but this is not the case.
In bookkeeping a credit either increases a liability or equity account, or decreases an asset or expense account.
Debit entries have the opposite effect, decreasing liability or equity and increasing asset and expense accounts.
They work in partnership with each other to create a double entry system. This creates a balance within the accounts.
For each debit entry there will be a corresponding credit entry.
An example of this might be if you purchase goods. The bookkeeping entry could be to debit purchase account and credit bank account.
Bookkeeping is about processing debits and credits to provide a balance of accounts. This then makes up financial reports and statements.
In addition to the above, as with many terms explained, the term ‘credit‘ can also be used to describe an agreement with a customer, to obtain goods or services and to make payment at a later date in the future.
Debits and credits should be tracked and accounts balanced.
Using accounting software can make this processes a little bit easier, and will help to keep track of credits and debits.
We are ready to help if in doubt.