Using Debits and Credits
Knowing upfront that debits and credits must be equal, lets look at some examples of debits and credits in financial accounting.
If you purchase inventory at $1,000, your journal entry would look like this:
- Debit to your inventory account of $1,000
- Credit to your cash in bank account of $1,000
If you pay all your utility bills that total $1,000, you journal entry would look like this:
- Credit to your cash in bank for $1,000 to pay the utility bills
- Debit your utility expense accounts: $500 to telephone, $250 to water, $250 to gas and electricity. Here the debits and credits still equal.
Companies that buy on credit will have to make journal entries for accounts payables that will look like this if say $1,000 is charged:
- Credit accounts payables $1,000
- Debit the expense account(s) $1,000
When it’s time to pay for the items you purchased on credit your journal entry would be this:
- Debit accounts payable $1,000 to clear the outstanding debt
- Credit your cash in bank once the $1,000 check is written, it’s not necessary to deal with the expense account; you did that first as shown above.
If you allow people to open charge accounts with your business, you to enter that into your general ledger this way:
- Debit your accounts receivable account for the amount the customer charged, say $1,000.
- Credit the appropriate sales account depending upon what was charged by the customer for $1,000
Once the customer pays you, your entry would become this:
- Credit your accounts receivable account to clear out the charge due for $1,000
- Debit the sales account utilized when you set up the receivable.