Understanding debits and credits is fundamental to bookkeeping and accounting. These terms are used in double-entry accounting, a system that records every financial transaction with at least two entries: a debit and a credit. Here's what you need to know:

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Debits:

- Debits are recorded on the left side of an account.

- They represent an increase in assets, expenses, or dividends, or a decrease in liabilities, equity, or revenue.

- Examples of debit transactions include:

-> Purchasing inventory with cash (increase in inventory, decrease in cash)

-> Paying rent expense (increase in rent expense, decrease in cash)

-> Withdrawing funds from the owner's equity (decrease in owner's equity, increase in cash)

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Credits:

- Credits are recorded on the right side of an account.

- They represent a decrease in assets, expenses, or dividends, or an increase in liabilities, equity, or revenue.

- Examples of credit transactions include:

-> Selling goods on credit (increase in accounts receivable, increase in revenue)

-> Taking out a loan (increase in cash, increase in liabilities)

-> Paying off accounts payable (decrease in accounts payable, decrease in cash)

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Double-Entry Accounting:

- In double-entry accounting, every transaction impacts at least two accounts, with one account being debited and the other credited.

- The total debits must equal the total credits for each transaction, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.

-> For example, if you purchase inventory with cash, you would debit the inventory account to increase it and credit the cash account to decrease it.

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Types of Accounts:

- Assets and expenses increase with debits and decrease with credits.

- Liabilities, equity, and revenue increase with credits and decrease with debits.

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Accounting Equation:

- The basic accounting equation is Assets = Liabilities + Equity.

- When a transaction occurs, it affects this equation by changing the balances in the relevant accounts.

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Understanding the principles of debits and credits is essential for accurately recording financial transactions, preparing financial statements, and analysing the financial health of a business. It forms the foundation of double-entry accounting, providing a systematic way to record, track, and report financial information.

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