What is debit and credit on the balance sheet?

The balance sheet consists of two sides: debit and credit. These are two accounting terms that you will always encounter when dealing with bookkeeping. On the debit side are your assets, such as inventory and machinery. On the credit side, you can see where the money comes from, for example through equity or a loan.

In this blog, we explain when something is classified as debit or credit and what these terms mean for the financial health of your business.

The balance sheet: a financial overview of your organization

The balance sheet is an important financial overview that shows the financial position of your organization at a specific moment in time. It is always a snapshot: today’s balance sheet may differ from last month’s. On one side, the balance sheet shows what you own, while on the other side it shows how those assets have been financed.

Many companies produce an annual balance sheet because it is a obligatory part of the financial statements. However, you can also prepare a balance sheet in the interim, for example if you want to apply for a loan or attract investors. A good balance sheet provides a clear picture of the financial health of your business. It helps you identify risks, such as tight cash flow, and provides a solid basis for making financial decisions. Understanding what debit and credit mean is an essential part of this.

Debit vs credit: key differences

Below you can see the key differences between debit and credit at a glance.

What does debit mean?

Debit meaning: Debit derives from the Latin word ‘debere’ which can be translated as ‘to be owed’. Debit is the left side of the balance sheet and consists of everything your company owns or owes. We also call this the assets. Assets show how you use your company's capital and are divided into two categories: fixed assets and current assets.

• Fixed assets are possessions that you use for long periods of time. Think of the office building, machinery and company cars. But it also includes non-tangible assets, such as brand names, patents and intellectual property.
• Current assets are assets that can be converted into cash in the short term, such as your stock, debtors (customers who have yet to pay you) and cash.

In this blog, the assets on the balance sheet are explained in full.

What is a debtor?

A debtor is a customer who has received an invoice from your company but has not yet paid it.

Example of a debtor:

It is important to have a good overview of outstanding debtors to keep your company's cash flow optimal. With effective accounts receivable management, you always know exactly which invoices are still outstanding. Has the payment deadline expired and the money still not arrived? Then send the customer a payment reminder as soon as possible. Sometimes it is smart to give the customer a call. Perhaps there is something unclear about the invoice or the customer simply overlooked it. With a dedicated debtor management programme, you can manage this process more efficiently. Tight debtor management strengthens your company's liquidity and financial stability.

What does credit mean?

Credit meaning: Credit comes from the Latin word ‘credere’ and means ‘to entrust’. Credit is the right side of the balance sheet and shows how the assets have been financed. On the credit side are the liabilities. Liabilities consist of two main components: equity and liabilities.

• Equity is the difference between what you own and what you still have to pay, or assets minus liabilities.
• Liabilities consist of all the debts of a company, such as loans from the bank or outstanding invoices to suppliers (creditors).

In this blog, the liabilities on the balance sheet are explained in full.

What are creditors?

A creditor is a supplier to whom you still have to pay money for goods or services delivered. A creditor is also called a creditor.

Example of a creditor:

Suppliers who provide goods or services ‘on credit’ temporarily give your business additional financial flexibility: as long as their invoices remain unpaid, you can use that money for other purposes. While this can be useful, it also requires careful monitoring. With effective accounts payable management, you can ensure that payments are made on time. This prevents late payments and hassles with reminders. In addition, of course, you want to maintain a good relationship with suppliers.

With an accounts payable management programme, you know exactly which invoices are outstanding and when they are due for payment. This way, you limit financial risks and ensure that your company remains financially healthy.

Simplify your accounts payable management with SimpledCard

SimpledCard makes managing your business expenses simple and straightforward. With mobile claims management you gain insight into your accounts payable and keep a grip on all payments.

Employees pay with SimpledCard cards with predefined spending limits. You have real-time access to the transaction history and balance of all cards. Employees can easily scan receipts via the mobile app, and these are automatically linked to the correct transactions.

Because employees can pay directly from your organization’s budget, there is no longer any need for them to submit expense claims that need to be reimbursed later. This simplifies your accounts payable management and helps prevent errors, fraud and confusion in expense management. The SimpledCard system can easily be integrated with your accounting software, ensuring that your bookkeeping is always up to date.

Request a demo now

Curious to discover how SimpledCard helps keep the debit and credit sides of your balance sheet in balance? We help organisations gain full insight into their expense management processes. Request a free demo today and make your administration smarter, more efficient and fully digital.