Most business owners understand that they need to keep track of their income and expenses but many get tripped up when figuring out what accounts are debits and credits. By getting a firm grasp on the concept of debits and credits, you’ll have a leg up when it comes to completing your accounting accurately.

Debits and credits are used in double entry accounting to ensure that everything balances out at the end of the accounting period. With it, you record each transaction as a debit and a credit, hence the name double entry accounting. Because you are accounting for all movement of funds, you get a clear picture of your financial standing.

At any point, the total of the entries on the left side of the trial balance (debits) will equal the total of the entries on the right side (credits). A trial balance includes all accounts from the balance sheets and profit and loss statements. It also acts as a proof sheet for the books. Any difference between the totals on the right and left side means that there is an error in the books that should be investigated. 

In this guide, we’ll go over the basics of bookkeeping—what accounts are debits and credits and how to record them in your books.

What Are Debits and Credits?

In accounting, debits and credits are used to record financial transactions. A debit is an entry on the left side of an account, while credit is an entry on the right side of an account. Debits and credits will increase and decrease account balances differently depending on the type of account, which we will look at more closely below. 

In double-entry bookkeeping, each financial transaction is recorded as both a debit and a credit. 

For example, when a company purchase supplies on credit, the transaction would be recorded as a debit to the supplies account and a credit to the accounts receivable account. 

You also use a chart of accounts, that includes items like rent, utilities, payroll, and more. It helps you organize and index all your accounts and transactions, usually in a chart format. 

While debits and credits may seem confusing at first, they provide a valuable way of tracking financial transactions. By understanding how debits and credits work, you can gain valuable insights into your business’s financial health.

What Is the Difference Between a Debit and a Credit?

In accounting, there are two fundamental types of transactions: those that result in a decrease in assets or an increase in liabilities (debits) and those that result in an increase in assets or a decrease in liabilities (credits). 

The key difference between debits and credits lies in their effect on the accounting equation. 

• Assets = Liabilities + Equity

A debit decreases assets or increases liabilities, while a credit increases assets or decreases liabilities. 

In other words, debits always reduce equity while credits always increase it. For this reason, debits are sometimes referred to as “drawings” while credits are called “investments.” 

At the end of the day, it all comes down to simple math: whatever is not an asset must be a liability or equity. 

If you want to increase your assets without also increasing your liabilities, you need to find someone willing to invest in your business (i.e., give you a credit against an outstanding invoice). 

If you want to decrease your liabilities without also decreasing your assets, you need to find someone willing to invest in your business. The goal is always to keep the accounting equation in balance.

How Do You Record Debit and Credit in Your Books?

When you’re keeping your own books, it’s important to understand how to record both debits and credits. 

At its most basic, a debit is an entry on the left side of a ledger, indicating an increase in assets or a decrease in liabilities. A credit is an entry on the right side of a ledger, indicating a decrease in assets or an increase in liabilities. 

In order to keep track of your finances, you need to be sure to enter both types of entries into your bookkeeping system.

There are a few different ways that you can do this. One option is to create two separate ledgers, one for debits and one for credits. Another option is to use a software program that will automatically keep track of both types of entries. Whichever method you choose, be sure to keep accurate records so that you can always know where your money is going.

Most accounting software forces you to keep your books in balance because it will not allow you to save an entry that doesn’t have equal credits and debits. 

Types of Accounts and How They Are Recorded

There are several groups of accounts that are included in your financial statements. Debits and credits will affect each account differently.

Assets

When you debit an asset account, it goes up, and when you credit it, it goes down. That’s because assets are on the left side of the balance sheet, and increases to them have to be entries on the right side of the ledger (i.e., debits). On the other hand, decreases have to be entered on the left side (credits). 

So if you’re adding cash to your checking account, that’s a debit to the account (increasing its value), but if you’re writing a check, that’s a credit (decreasing its value). 

The same goes for your other asset accounts: inventory, investments, etc. The reason this is important to understand is that it will help you keep your books in balance. If you don’t debit and credit the accounts correctly, your books will be out of balance, and you won’t be able to prepare accurate financial statements.

Liabilities

When you debit a liability account, you’re increasing the amount of money that the company owes. For example, if you debit Accounts Payable, you’re decreasing the amount of money that the company owes to its suppliers. 

On the other hand, if you credit a liability account, you’re increasing the amount of money that the company owes. For example, if you credit Accounts Receivable, you’re increasing the amount of money that the company owes to its vendors. 

In general, debiting a liability account decreases the amount of money that the company owes, while crediting a liability account increases the amount of money that the company owes.

Equity

Equity accounts are records of a company’s ownership stake, so they are affected by debits and credits in different ways. When a company receives money from shareholders, it is recorded as a credit to the equity account. 

This increases the company’s equity. Conversely, when the company pays out dividends to shareholders, it is recorded as a debit to the equity account. This decreases the company’s equity. By understanding how debits and credits affect equity accounts, businesses can keep accurate records of their financial position.

Expense

With regards to expense accounts, debits increase the balance of the account while credits decrease the balance. So, if you have an expense account with a balance of $1,000 and you make a purchase for $100, the new balance of the account would be $1,100 (a debit of $100 increased the balance by $100). 

If you then made a payment of $50, the new balance would be $1,050 (a credit of $50 decreased the balance by $50). It’s important to keep track of both debits and credits so that you know what your current balance is at all times.

Revenue

In a revenue account, an increase in debits will decrease the balance. This is because when revenue is earned, it is recorded as a debit in the bank account (or accounts receivable) and as a credit to the revenue account. 

An increase in credits will increase the balance in a revenue account. So, if a company has more expenses than revenue, the debit side of the profit and loss will be higher and the balance in the revenue account will be lower. In summary, credits increase the balance in a revenue account while debits decrease the balance.

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Debit and Credit Examples

Below are a few examples of transactions.  

Purchase of Office Supplies on a Credit Card

The purchase of $150 of office supplies on a credit card would result in a debit posted to the office supply account and a credit to the credit card account. This would increase the office expense account and increase the credit card liability account. However, it’s important to note what not to charge to your business credit card to maintain financial integrity and clarity.

Taking Out a New Loan

A company takes out a new loan of $7,500 to increase its working capital. The funds from the loan are deposited directly into the company’s bank account. This results in an increase in the company’s bank account balance and increases the company’s liabilities.

Shareholder Distribution

When a shareholder takes a distribution, the cash in the company’s bank account decreases, and the shareholder’s distribution account increases. 

As you can see from the debits and credits examples, each column balances the other out. 

Cheatsheet Chart of Debits and Credits

We’ve put together a chart showing how debits and credits affect different types of accounts. Keep in mind that we’ve provided very basic examples above and many journal entries will use more than two accounts.

The best way to keep your books in order and protect yourself from financial mistakes is to understand what accounts are debits and credits and how to record them. By keeping track of every transaction, you can avoid any confusion or discrepancies that could lead to bigger problems down the road. 

Bookkeeping is non-negotiable for a successful business, but it doesn’t have to be difficult. Xendoo can manage your bookkeeping for you, so you have an up-to-date, accurate ledger at all times. 

Plus, you get financial reports like balance sheets and profit and loss statements prepared for you each month. You can easily outsource your bookkeeping and accounting with Xendoo. Learn more about Xendoo plans or schedule a call back to talk to the Xendoo bookkeeping team. 

Running a small business is a big job and you may not have the time or experience to manage your own books. If you’re considering hiring an online bookkeeping service, one of the first things you’ll want to know is how much does a bookkeeper cost? Below is an overview of small business bookkeeping and how much it costs. 

Do You Need a Bookkeeper for Your Business?

Although bookkeeping may not be the most exciting part of running a business, it’s arguably one of the most important. Accurate and timely bookkeeping allows you to make sound financial decisions.

Bookkeeping can help you maintain your financial records, track expenditures and revenue, and provide an up-to-date snapshot of the growth and overall health of your business. With an organized bookkeeping process, you’ll have all your financial documents in order and be better prepared for tax season. 

Is a Bookkeeper Cheaper Than an Accountant?

Accounting and bookkeeping sometimes get lumped together. However, when talking about bookkeeper costs, it is important to note their differences. For one, a bookkeeper is generally cheaper than an accountant, because they have different functions, expertise, and qualifications. 

Bookkeepers manage the day-to-day financial functions of a business. The types of services bookkeepers may perform include: 

• Managing your accounts payable and receivable
• Paying vendors, suppliers, and other bills
• Tracking customer invoices and payments
• Aiding with payroll
• Reconciling bank accounts
• Managing online bank fees
• Performing cash flow analysis
• Financial reporting

Accountants can do those functions and also provide big-picture business financial reports, strategies, and insights. In addition, accountants can help you prepare and file business tax returns. 

Now, you may have an accountant that also completes the tasks of a bookkeeper, but not the other way around. Accountants must meet specific education and certification requirements that vary slightly by state. In general, accountants usually need a bachelor’s degree in accounting and pass a CPA exam in their state. 

Because of the extra training, what accountants charge differs from bookkeepers. A bookkeeper might charge you anywhere from $30 to $90 an hour. CPAs charge even more. 

If you’re wondering, “How much does a CPA cost?”, you may be surprised to find them considerably higher than a bookkeeper. CPA costs can fall in the $150 to $450 hourly range. 

(Xendoo’s Boost plan and up include accounting tax and CPA services as well as bookkeeping so you can get both in one flat monthly fee.)

How Much Does a Bookkeeper Cost?

The average cost of a bookkeeper ranges anywhere from $500 to $2,500 a month. 

However, there’s no set cost for hiring a professional to manage your business’s finances. It varies depending on the type of financial expert you hire and the particulars of your business. 

Some factors that affect how much a bookkeeper costs are: 

• The size and complexity of your business
• The number of monthly transactions
• Type of bookkeeping services and hours you need
• A bookkeeper’s location, expertise, and experience

How much a bookkeeper costs also depends on the payment arrangement. You’ll usually pay for bookkeeping services in one of the three ways—hourly, salary, or a flat fee. 

How you pay your bookkeeper depends on whether they are in-house (full-time or part-time employees), freelance, or an online bookkeeping service. Let’s look at the costs and considerations for each. 

In-House (Salary)

Most businesses pay in-house bookkeepers on a salary basis. Although, some may pay hourly, especially for part-time employees. 

How much does a bookkeeper cost if you hire in-house? The short answer is much more than an online bookkeeping service or freelancer. 

According to Salary.com, the average bookkeeper salary in the United States is $45,816. That does not include benefits such as healthcare or location. It also assumes the bookkeeper is entry-level with no specialized experience or qualifications. 

The salary of an entry-level bookkeeper in Brooklyn, New York, is estimated to be around $55,117, but it ranges from $55,000 to $70,000. Add in years of experience, benefits, and cost of living and it gets more expensive.

It might make sense for a large business with complex bookkeeping needs year-round to have an in-house bookkeeper. However, for most small businesses, an online bookkeeping service is a better option. 

Hourly Pricing (Freelance)

Based on a recent Bureau of Labor Statistics (BLS) report, the median hourly rate for a bookkeeper is $21.90 per hour. Again, this doesn’t account for location, expertise, or services. Most bookkeepers that charge an hourly rate are freelancers, but not always. 

Hourly pricing is a great option when you only need help with the books occasionally. You can hire someone to come in on a per-project basis and only pay for the time they spend on the project or for an agreed-upon time. 

While this makes it easier to control your bookkeeping costs, most small businesses require consistent services to keep their books straight. 

Hourly may seem like the cheaper option, but it isn’t always the case. If you need more bookkeeping than you expected, those hours can add up fast.

Flat Fee (Xendoo)

Flat fee bookkeeping is the simpler of the three options. It allows you to pay a set price each month for an unlimited amount of work.

While some months may not require much from a bookkeeper, others are inevitably going to be busier than others. This makes it easier to manage your business bookkeeper costs by factoring in a consistent monthly rate.  

At Xendoo, finding the perfect flat fee plan is easy, so you aren’t paying more for the specific things you need. Xendoo pricing takes into consideration the varying needs of businesses by offering a range of plans based on your monthly expenses. 

Depending on your bookkeeping needs, you can pay as little as $275 a month (when billed annually). In addition to bookkeeping and tax advice, plans come with accounting software like Xero and Quickbooks, mobile apps, and profit and loss statements.

While this may look like another added expenditure for your business, this monthly cost pays for itself. If you had to do your own books, how much time would it take? Likely, much longer than it will take an expert who can quickly catch issues the untrained eye may miss.

The Xendoo team can also save you money by ensuring all your expenses are properly tracked so there are no surprises when it comes time to file taxes. We’re familiar with all the small business tax deductions and compliance requirements. 

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Our bookkeeping and accounting experts keep your books clean, organized, and on time, every time.

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What’s Included With a Business Bookkeeping Service?

A bookkeeping service does more than preserve financial records. It records all your financial metrics and assures you maintain regulatory compliance at the state and federal levels. 

Instead of going through the hassle of hiring and paying accountant pricing, many businesses have turned to online bookkeeping services. This minimizes bookkeeper costs and reduces overhead.

If you are still wondering how much does a bookkeeper cost, explore your options. An online bookkeeping business has likely automated most of the services you require and they can have a team of experts at the ready if you are in need of help.

What to Look For in a Bookkeeper

Most business owners are great at what they do, but it can still be tedious when they have to reconcile the daily reports and manage all the paperwork after a long day at work. Hiring a bookkeeper to maintain your financial records is a smart investment.

Here are some tips to help you find the right bookkeeping service for your business:

Credentials

The highest referral a business owner can find is from a friend in the industry. If you’re looking at an online bookkeeping service, verify their ratings. Ask how long they’ve been in business, and whether they have accountants on staff to help with the bigger questions.

Find a Professional Bookkeeper

A professional bookkeeper may have the certifications and work history, but have they dedicated their career to helping other businesses to succeed? Look for a bookkeeping service whose business model relies on the success of others.

Hire an All-in-One Bookkeeping Service

Some accounting firms only provide basic reconciliation services. However, businesses need services that can also handle payroll and taxes. See if they can integrate with your current bookkeeping software.

Integration between multiple accounting platforms makes keeps all your data in one place and makes bookkeeping quicker and easier.

Availability

In many cases, bookkeeping is handled after hours, so it’s important that you have a bookkeeping service available when you need it. 

Find a company that offers 24-hour service so that they can help you when you need it most. After all, some of the hardest times to get help are during the weekends and in tax season, but this is exactly when you’re most likely to have questions.

Don’t Look for the Cheapest Partner

When considering the question of how much a bookkeeper costs, think about what matters most to you. 

Prices matter when it comes to running a business, but a bookkeeping service is not a place where you want to cut corners. Part of the advantage of a professional service is that it can save you money by reducing the time spent on basic tasks. It can also help you to better track your spending and analyze potential financial hazards.

A small business bookkeeping service is an investment that helps you grow. Our expert team of bookkeepers and CPAs makes managing your finances easy so you can get back to business. Contact us today or get started with a free trial.