Debits = Credits
These two equations are absolute in accounting. But what are debits and credits you may ask?
They are something to memorize.
Accounts are used to indicate and summarize the increases or decreases to and balances of each asset, liability and owner's equity-type items, such as, capital, withdrawals, revenues and expenses.
Businesses establish an account for anything they wish to keep track of separately.
Think of an account like a bucket. If you put water in, you are increasing the water in the bucket; if you pour water out, you are decreasing the water in the bucket. An account works the same way.
Let us assume that Luca Pacioli, the Franciscan monk who described the double-entry bookkeeping system over 500 years ago, said to himself:
I want everything in my system to look the same. Even though my basic equation
that will rule everything that is done in the system is: Assets = Liabilities
+ Owner's Equity, I cannot be spending all my time worrying about that. I need
to record the different transactions in one place and I need to keep the effects
to the different assets, liabilities, capital, withdrawals, revenues and expenses
separate. I need to show the increases and decreases to each account, but I
want the accounts to look the same. How can I do that?
He decided that if he labelled the same columns in all accounts Increase and
Decrease or if he labelled different columns in different kinds of accounts
Increase and Decrease, he could not be sure that Assets = Liabilities + Owner's
Equity without looking to make sure after each transaction was recorded nor
could he list the transactions neatly in one place. It just was not possible
to do both those things at the same time unless the accounts looked the same.
So, eventually along came the solution - use at least two columns in each account. Use one column for increases and one column for decreases. But, instead of using the same column for increases/decreases in every account, use one column for increases and the other column for decreases in asset accounts and use the opposite columns for increases and decreases in liability and owner's equity accounts. This allows you to list what you are going to do to each account (no matter what account) for each transaction in one place and the equation Assets = Liabilities + Owner's Equity takes care of itself without your having to worry about it.
The rules are arbitrary, but it was decided that increases to asset accounts would be shown in the left column and decreases to asset accounts would be shown in the right column. That means that increases to liability and owner's equity accounts are shown in the right column and decreases to liability and owner's equity accounts are shown in the left column. This accomplishes all of the goals. It works!
Wait a minute! What if there is an account like (Owner's Name), Withdrawals or an Expense? They decrease Capital. No Problemo! Use the left column to increase these kind of accounts because they decrease owner's equity. This just leaves one other thing to deal with.
Rather than say: put in the left column, say: Debit.
Rather than say: put in the right column, say: Credit.
Click here to contact Tutor. Click here to return to Table of Contents.
WOW!! There are no questions in this module, but there are several modules to
follow that will hopefully help you to memorize debit and credit rules. Read
this module again, give yourself a few minutes to relax, then try some of the
following modules on debits and credits. You can also access these modules from
the Table of Contents or from each successive module.
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