Of course at the end of your VAT quarter part of that cash will go to HMRC to clear the VAT creditor. At this point you credit debtors (to remove the amount owed) and debit your bank balance. the business owes HMRC £20 (bad, CR balance sheet)Īt a later point the customer will hopefully pay for their purchase.there has been a net sale of £100 (good, CR profit & loss).the customer owes the business £120 (good, DR balance sheet).This is often shown in a “T” account, where debits are always shown on the left, and credits on the right (if you live in the UK this is because you DRive on the left, and CRash on the right (debits and credits are often abbreviated to Dr & Cr) Note that although there are three transactions, the total of all the debits and credits still agrees. £20 Credit to the VAT creditor on the balance sheet.£100 Credit to sales on the profit & loss.£120 Debit to debtors on the balance sheet.Say a sale is made for £100 excluding VAT with credit terms given to the customer. This simple situation is complicated slightly if the business is VAT registered. Credit sales on the profit & loss (a sale has been made).Debit cash on the balance sheet (cash balance has increased).A Credit to the profit and loss is good (increasing income or reducing an expense).A Credit to the balance sheet is bad (reducing an asset or increasing a liability).A Debit to the profit and loss is bad (increasing an expense or reducing income).A Debit to the balance sheet is good (increasing an asset or reducing a liability).Easy way to understand where to put your debits and credits More complex transactions may lead to a larger number of postings, but the total of the debits for that transaction will always be equal to the total of the credits. Every transaction you make will lead to (at least) two entries in your accounts, a debit and a credit.
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