In the secret language of accounting, the terms debit and credit are used. In an even more secret dialect, they are called per and an. If you want to casually chat with an accounting guru and sound smart, sprinkle these words here and there. You’ll make an even better impression if you use them in the right places!

Both sides of an accounting account

Every account in accounting has two sides. On the left is the debit side, which shows where the money goes, and on the right is the credit side, which shows where the money comes from. Each transaction is recorded on the debit side of one or more accounts and on the credit side of one or more accounts. The amounts must always be equal on both sides.

Debit

In accounting, expenses are always recorded on the debit side — that is, where the money went. This could be purchases, salaries, insurance, car expenses — anything at all. Whenever money is spent on something, it belongs in the debit column.

Let’s say Marja Smoothie buys frozen fruit from a wholesaler to make drinks, and plastic cups to pack the finished drinks in. The fruit costs €100 and the cups €10, including VAT. Marja pays with a bank card.

Four accounts are used for this receipt. On the income statement side: purchases VAT 14% and purchases VAT 24%. On the balance sheet side: VAT receivable from purchases and bank account.

The easiest way to think about it is that the full amount, 110€ is paid from the bank account, so it’s recorded on the credit side of the bank account in the balance sheet.

Next, we figure out where the money went. The receipt shows that the frozen fruit has a VAT rate of 14%, so its VAT-free price (87.72€) goes to the debit side of purchases VAT 14%. The VAT portion (12.28€) goes to the debit side of VAT receivable from purchases in the balance sheet.

At this point, debit (purchases VAT 14% + VAT receivable) totals €100, but credit (bank account) is 110€. The sides don’t balance, so something’s missing.

Looking at the receipt again, the plastic cups haven’t been recorded yet! We record the VAT-free portion (8.07€) in purchases VAT 24% and the VAT portion (1.93€) in VAT receivable from purchases. Now debit and credit match. The entry is done.

Software makes it easier

Depending on the software, you might not need to manually record the VAT portion separately. In SimplBooks, entries are made with the VAT-inclusive amount, and the system automatically calculates the VAT and posts it to the correct account. You just need to be careful to select the right VAT rate for each transaction.

The Marja Smoothie example in SimplBooks would look like this:

CREDIT Bank account 110.00€
DEBIT Purchases VAT 14% 100.00€
DEBIT Purchases VAT 24% 10.00€

The software then calculates the VAT and posts it to the right account automatically.

Credit

Credit shows where the money came from. If you buy something, the purchases go into debit, and credit shows how you paid for them. If you deposit money into the company’s bank account, the money goes into the bank account’s debit, and credit shows the source. Sales are always recorded in credit.

Example: Marja Smoothie sells drinks for 100€ in cash.

CREDIT Sales VAT 14% 87.72€
CREDIT VAT payable on sales 12.28€
DEBIT Cash register 100.00€

The money came from sales and went into the cash register.

Later, Marja Smoothie deposits the cash into the bank:

CREDIT Cash register 100.00€
DEBIT Bank account 100.00€

The money came from the cash register and went into the bank account.

Debit and credit aren’t difficult if you don’t overthink them. When deciding which side to use, think about whether the account balance increases or decreases, and remember that sales increase in credit while the bank account increases in debit.

And now, the secret of per and an can be revealed: per means debit, an means credit. In spoken language, you might say: “Record the frozen fruit per purchases VAT 14% an bank account,” and the listener will instantly understand – or at least pretend to.