Double entry bookkeeping can be a hard concept to grasp, and knowing how to enter or manipulate your data to reflect accurate representations is usually a job that most business owners leave to their accountant.
While I certainly advocate for receiving professional advice, if you are migrating to a new system or need to make adjustments in your existing system, it is important to know how those adjustments can affect either side of your balance sheet.
Trying to remember all of the rules is tedious, and frankly not something that you should be filling precious brain space with. So, I am going to tell you a secret way that you can remember the rules of debits and credits. These two hacks do not rely on special memory, and once you find the one that works for you, should see you on your way to understanding T-accounts and double entry bookkeeping a bit better!
Hack 1 - 5 Fingers
Personally, I am not a fan of this one, but for many this is not the case. It does rely on a deeper understanding of the accounting equation and then uses both hands to help you identify the positive and negative flows through your accounts.
The accounting equation, when expanded is: Assets = Liabilities + Owner’s Equity + Revenue - Expenses or otherwise expressed as A = L + OE + R = E
Now, look at your left hand and fold your three middle fingers, leaving your pinky and thumb pointing straight up. Assign an account to each finger. So, A = pinky, L = ring finger, OE = middle finger, R = pointer finger and E = thumb.
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What you need to remember from here is that your left hand represents a debit classification and the direction your finger is pointing shows you the influence that the debit has on your account. So that means:
A debit increases Assets
A debit decreases liabilities
A debit decreases Owner’s Equity
A debit decreases Revenue
A debit increases Expenses
Therefore, based on that, a credit then does the opposite:
A credit decreases Assets
A credit increases liabilities
A credit increases Owner’s Equity
A credit increases Revenue
A credit decreases Expenses
Hack 2 - DC ADE LER
On those days when I am having a brain meltdown, this hack has been a saviour. In-fact, this acronym is written on my whiteboard in my office permanently as my safety net when I am under the pump.
This acronym is split out into three sections and we will be using them to create a lovely little table that reflects all the positive movements that these actions represent.
DC: These are your column headers and represent Debit and Credit
ADE: Represents Assets, Drawings and Expenses and should be placed on your Debit side
LER: Represents Liabilities, Equity and Revenue and should be placed on your Credit side
Once you have written it all out, you should be looking at a table that is ready for you to use!
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As this method reflects positive movements, then:
A debit increases assets
A debit increases drawings
A debit increases expenses
A credit increases liabilities
A credit increases equity
A credit increases revenue
So there you have it! Two incredibly simple hacks to help you remember how a debit or a credit affect your accounts.
If you want to know more about debits and credits and bookkeeping for SME’s in general, join our subscriber list for links to free training. If you prefer some one on one training, head to our calendar and book your free consultation!