In accounting, /Digitalmarketingtips.info debits and credits are used to record the effects of transactions on a company’s financial records. Debits are used to record increases in assets, expenses, and dividends, while credits are used to record increases in liabilities, equity, and revenues.
There are a few reasons why businesses use credits to record certain transactions. First, credits are used to balance the accounting equation. The accounting equation is a mathematical equation that shows the relationship between a company’s assets, liabilities, and equity. The equation is:
Assets = Liabilities + Equity
When a transaction occurs, it must be recorded in a way that keeps the accounting equation in balance. For example, if a company purchases equipment on credit, the asset account “Equipment” will be increased by the purchase price. The liability account “Accounts Payable” will also be increased by the purchase price, in order to balance the accounting equation.
Second, credits are used to show the source of an increase in an account. For example, if a company receives cash from a customer, the asset account “Cash” will be increased. The credit to the cash account shows that the increase in cash came from a customer.
Third, credits are used to show the destination of a decrease in an account. For example, if a company pays a bill, the liability account “Accounts Payable” will be decreased. The credit to the accounts payable account shows that the decrease in accounts payable came from a payment to a supplier.
In general, /7Continentsmedia.com credits are used to record increases in liabilities, equity, and revenues, and decreases in assets and expenses. This helps to keep the accounting equation in balance and to show the source and destination of changes in account balances.
Here are some examples of transactions that are recorded with credits:
- A company receives cash from a customer.
- A company pays a bill to a supplier.
- A company earns revenue from selling goods or services.
- A company declares a dividend to shareholders.
- A company borrows money from a bank.
- A company issues stock to shareholders.
By understanding how and why businesses use credits to record transactions, you can better understand the financial statements of a company.