You don’t have to know debits and credits to do a business plan. As I say elsewhere, planning is not accounting. You don’t need to be an MBA or CPA to develop business plan financials. You need to be able to make reasonable assumptions and follow the financials, preferably using Business Plan Pro software.
Still, some simple understanding is useful, and easy. Debits and credits originally appeared as part of the double-entry bookkeeping system that supports the entire world of financial accounting, planning, and analysis.
It starts out with a simple accounting sheet, as you see here. You write the item in one column, the debit in another, and the credit in a third.
You’ll notice that the single transaction has two entries, one of $635.32 for the sale and the other for the related $635.32 for the cash. Here’s another:
It can get a lot more complicated than that, but with these examples you can see the foundations of the system. Here are some built-in standards that might help.
- Every transaction has to have equal amounts for debits and credits. Accounting must always balance debits and credits. That’s were the word “balance” comes from.
- The amount of a sale is normally a credit. A debit to sales is the same as a refund. It reduces sales.
- Costs and expenses are normally debits. You debit the expense account and credit the way it was paid (as in the checking balance or cash) or not paid (as in Accounts Payable).
- An increase in an asset is always a debit. An increase in a liability is always a credit.
- An increase in capital (for example, a new investment) is always a credit. A new investment is a credit to capital and a debit to the checking account.