For example, if your company purchases $800 in business supplies, you would be inclined to think of taking $800 cash out of the checking account, and you would be right. The theory behind this is that for every transaction, you are taking money away from one account and adding it to another account. In double-entry accounting, every financial transaction must have two journal entries, or affect two different accounts: the debit transaction and the credit transaction. Because debits must always equal credits, it is common practice to use double- entry accounting to prevent errors. This is yet another extremely important accounting equation to remember. When using double-entry accounting, debits must always equal credits: They can use the single-entry, or one-column method, or the more widely used double-entry, or two-column, method to show debits and credits. There are two methods accountants use to show credits and debits for financial transactions. In this representation, you draw a big capital letter 'T' on a paper, and on one side of the T you place your debits on the other side of the T, you place your credits and on the top of the T, you usually name the item you are debiting or crediting, as shown: When representing the debits and credits equation, accountants and bookkeepers commonly use the 'T' accounting method. In bookkeeping texts, you will see debits abbreviated as 'Dr.' and credits abbreviated as 'Cr.'

Quite simply, either you are crediting money or debiting money to the overall balance. The balance sheet is also commonly referred to as the statement of financial position.Įvery accounting transaction must be either a credit or debit.

The balance sheet is derived using the accounting equation. It summarizes a company's assets, liabilities, and owners' equity. A company will use a Balance Sheet to summarize its financial position at a given point in time.

Debit credit analysis