Debits and Credits

Understanding a few basic concepts will help you get the most out of MonkeyPod and make you a stronger financial manager. Perhaps the most fundamental of these concepts is the idea of debits and credits.

What are Debits and Credits?

If you previously used a generic small business accounting tool like Quickbooks, you may have been able to avoid thinking too much about actual accounting principles. That kind of simplicity is appealing, but it increases the chance of mistakes in your books and limits your ability to record more complicated transactions. 

Everything in Balance

Double-entry bookkeeping (the universal standard since at least the Middle Ages) is based on the idea that: 

  1. Every transaction must include at least one "debit" and at least one "credit".
  2. The sum of a transaction's debits must always equal the sum of its credits; this means that a transaction is "balanced".

Debits vs. Credits

Where inexperienced bookkeepers sometimes get confused is in remembering when to use debit and when to use credit. The easiest way to think about this is in terms of the effect the debit or credit will have on the account in question, which depends on the type of account:

Asset Debit makes it go UP Credit makes it go DOWN
Liability or Net Asset Debit makes it go DOWN Credit makes it go UP

Let's look at a few examples that explain more:

Writing a Check to Pay Rent

  • Reduces your checking account, so that's a credit to Checking.
  • Normal expense, so that's a debit to Occupancy Expenses.

Paying a Credit Card Bill

  • Reduces your checking account, so that's a credit to Checking.
  • Reduces your credit card (liability) account, so that's a debit to Credit Card.

Receiving a Donation Check

  • Increases your undeposited funds (asset) account, so that's a debit to Undeposited Funds.
  • Normal income, so that's a credit to Contributions.

Receiving a Refund Check for Overpayment to a Contractor

  • Increases your undeposited funds account, so that's a debit to Undeposited Funds.
  • Reverse / negative expense, so that's a credit to Professional Fees and Contract Labor.

Even Easier than You Think

In practice, you may find that you only need to remember one of these principles (for example, that debits increase asset accounts), because then you can always figure out the rest based on the double-entry bookkeeping idea of offsetting debits and credits.

Also, keep in mind that MonkeyPod will always prevent you from accidentally recording a transaction that doesn't balance. 

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