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Understanding debits and credits


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The route to more reliable financial information

Many people I speak to express their concerns at the lack of fundamental accounting skills within accounts departments. In particular they refer to people who handle the recording of financial transactions and do not understand debitUnderstanding debits and creditss and credits.

To me this is not a new problem. It has often been the case that people start working in the accounts payable, accounts receivable and general ledger functions of an accounts department without any basic training in accounting. Despite this, they will still be expected to understand the debit and credit convention of accounting.

How many times do you hear people saying “Why am I debiting one account record and crediting another?”

I remember attending a company’s management meeting once where the Company Accountant presented the monthly accounts.  During the meeting, the Sales Manager asked why the debtors were so high in the Balance Sheet and this led to an uneasy moment for the Company Accountant who gave a very vague answer.  After the meeting the Accountant set about finding the right answer.  What do you think the answer was?  It was due to a fundamental error which lead to the debtors being significantly overstated with a compensating overstatement of the VAT liability.

Quite clearly errors should be detected before the accounts are finalised and in a perfect world they would not happen at all - but they do, causing:

  1. misinformation being presented to senior managers;
  2. embarrassment for the people who rely upon their financial systems to produce complete and accurate financial information; and
  3. feelings of incompetence by the people who unwittingly make the errors in the first place.

The debit and credit convention is not as difficult as it may seem.  If the rules that underpin the convention are properly explained, then people will be able to approach their job with more confidence and the organisation will benefit from more reliable financial information.

UK Training have developed a technique which establishes four basic definitions and eight rules that help people master the convention and I will be sharing this at our brand new seminar in London on 10th June.  The presentation takes place between 1 pm and 5 pm at Hamilton House, which is within walking distance of Kings Cross, Euston and St Pancras Stations, making it convenient for people to get there from locations outside London.

Stephen Smith

Managing Director
UK Training (Worldwide) Limited


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