Accounting tips:
Understand Double-Entry
debit/credit accounting:
Definitions of
credit/debit:
0) A debit or credit are both types of
parts of a money transaction in a double entry bookkeeping system.
1) A credit always does the opposite to
a particular account that a debit does.
2) In a complete transaction in a
double entry bookkeeping system, the sum of the credits must equal the sum of
the debits for the transaction to be in balance.
3) Since in the world there are only
two kinds of accounts, your companies, and all the other companies in the
world, credits and debits should act one way on your accounts, and exactly the
opposite on other companies' accounts, so that money either flows from you to
others or from others to you.
4) A chart of accounts represents both
types of accounts, so that credits and debits must follow all the rules above.
|
DEBIT |
ACCOUNT CATEGORY |
CREDIT |
|
+ |
1= your company
ASSETS |
- |
|
- |
2 = rest of world
LIABILITIES |
+ |
|
- |
3 = rest of world
EQUITIES |
+ |
|
- |
4 = rest of world
REVENUE |
+ |
|
+ |
5-9 = your company
EXPENSES |
- |
Notes on usage: The Assets and Expenses model the activity of your company. The
Liabilities, Equities, & Revenues model the rest of the world that lose something when
your company gains something. This is why the debits and credits act opposite on you
versus your others. If you gain, someone else must lose unless you are just converting
some kind of value into another type within your own company. For example: You can reduce
your checking balance so as to increase an expense category. One must memorize this table
so that any question like: What does a credit do to a liability? One must be able to
answer immediately that the credit would increase the liability account. This is how one
learns to think about a new complex transaction that your company is having for the first
time. One can understand that this new complex transaction must have certain effects on
certain accounts and then figure out what the remaining effects must be in terms of a
debit or credit of which accounts since the over-riding rule is that in any one
transaction in a double entry accounting system the total of all debits must equal the
total of all credits.
The plus under the debit column to the left of the Assets account category means that a
debit will increase the balance of any Asset account.
For example: A REFUND CHECK COMES IN!
We know that the check will be deposited in the company checking account and that it
must increase the checking account balance, right? What other account do I put the deposit
to in my cash receipts area? The area where the original expense went is the place that
you should put it to, but why and what effect will this have? Since we know that an
increase in the checking account can only be caused by a debit because the account is an
Asset account, we know that the expense account will be credited by the same amount. What
does a credit do to your company's expense accounts. Looking at the chart, we see that the
credit will decrease your company's expense. Doesn't that make sense? Make sense out of
all your accounting packages transactions by understanding this chart and using it daily.
Soon you will understand the Double Entry Accounting system.
