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Accounting: Debits and Credits 101

Posted by Sara Duong, Consultant on Sep 14, 2021 4:06:23 PM
Sara Duong, Consultant
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pexels-photo-7063762As a NetSuite User, Administrator or Implementor, you don’t have to be a professional accountant. However, knowing some basic concepts helps you understand how your department or function impacts the company’s financials. With some basic accounting knowledge, you can validate if the item or transaction is configured correctly, meaning is it hitting your financial statements the way that it should. For the non accountants, there are 2 accounting concepts that are helpful: a basic accounting equation that always have to balance plus the use of debits and credits.

Very simply, there is one equation that needs to always balance:

Assets = Liabilities + Equity.

Assets are what increases the value of the company; it can contain physical assets, intangible benefits or money that is owed to the company. Liabilities are what the company owes, such as debt or bills we have not paid yet. Equity is what the company owes the stakeholders, ie earnings to be paid.

The general ledger (GL) helps keep this equation in balance at all times. With every GL impacting transaction, there are 2 entries to keep this equation in balance. You may hear the term double entry accounting, meaning there are 2 entries to keep this fundamental equation in balance. Those 2 entries are called a debit and a credit. Debits typically reflect an inflow of funds and credits can be viewed as an outflow of funds.

Here is a simple illustration of how the 2 concepts are related:

Asset

=

Liabilities

+

Equity

 

 

     

Debits

Credits

 

 

     

 

How the equation lines up with the debits and credits indicate the action that needs to happen to increase the value on that side of the equation. What this illustration is saying is when we debit an asset, meaning increase an asset account, we have to have a corresponding credit entry, which increases our liability or Equity.

An example would be, we purchased chairs with our credit card. This could be a debit to assets (we are increasing the value of our furniture/fixtures/equipment) and a credit to liabilities (we are increasing the amount of credit card payment that we have to pay out). With this debit and credit entry, we keep the equation balanced.

There are multiple and more complex examples of how to balance this fundamental accounting equation. If you need help configuring or validating your NetSuite process to accurately manage your balance sheet, please reach out to us for a health check or consultation.

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