I am taking a financial accounting class this semester, and despite weeks of trying to grasp the difference between debits and credits, I am just not getting it. I’ve read my text book and what Investopedia has to say about it, as well as many various articles I’ve found by searching.
From my reading, the following things are supposed to all be true (please correct if not):
1. Debits add to the balance of an account.
2. Credits decrease the balance of an account.
3. Assets = Liabilities + Equity.
4. In double accounting, credits = debits for each set of entries.
I understand how both 3 and 4 can be true if you’re just moving money around from accounts of the same type (i.e. two different types of assets), but how could 3 still be true if you’re debiting say, a cash account, and crediting sales revenue (which counts as equity?!).
Now, I understand that an account can be a credit account, such that we expect the value to be negative, and I seem to be seeing that both liabilities and equity are considered to be credit accounts. If that is true though, how could 3 be true? Assets have a positive number, and both liabilities and equity have negative numbers. Do we just forget that they are credit accounts with negative balances for the purposes of this equation? *boggle*
In: 4
I think what you are missing is that 1 and 2 are not always true when you are talking about debit and credit accounts.
For accounts that you expect to be negative (credit accounts), debits **decrease** the balance, and credits **increase** the balance.
So your facts should be more like
1. Debits add to the balance of a debit account and decrease the balance of credit account
2. Credits decrease the balance of a debit account and increase the balance of credit account
3. Assets (debit account) = Liabilities (credit account) + Equity (credit account)
4. In double accounting, credits = debits for each set of entries.
Answer: For 3 and 4 still hold true because equity is also a credit.
Assume I have a business, and it operates expense free..if I made $500 in sales, I will credit sales for $500, and cash gets a debit of $500. At the end of a period, I debit sales by $500, and credit it to equity by $500. Since I still have $500 cash, it still holds true.
We used to use the DEAD CLIC phrase to remember this
To increase the value of then, you want to
DEBIT
EXPENSES
ASSETS
DRAWINGS
CREDIT
LIABILITIES
INCOME
CAPITAL
In double accounting, in order to record a single transaction in your journal you are forced to record one (or more) debit account TOGETHER with record one (or more) credit account (or vise versa.).
And the sum of debit amount has to be equal the sum of credit amount for each transaction you record.
Once you post your journals to the balance sheets by group each records together by assets/liabilities/equities, the total debit amount is still equal to the total credit amount (but this time grouped by which one is assets, liabilities or equities.)
Does this help?
*Consider this example. You buy supplies from a wholesaler on credit for a total of $500. You would debit the supplies expense and credit the accounts payable account. By using the double-entry system, the business owner has a true understanding of the financial health of his company. He knows that he has a specific amount of actual cash on hand, with the exact amount of debt and payables he has to fulfill.*
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