Rules of debit and credit


Hello everyone I’m Nancy Ghodrat. Today
we’re gonna go over chapter 2 the objectives of chapter 2 are listed on
this screen and the first thing we want to go over is the definition of account
and definition of debit and credit so an account is basically a record of
increases and decreases in any asset, liability, common stock, retained earnings,
dividend, any types of revenue, and any expenses so there are three ways we can
show an account and we’re gonna go over that in a second but since we’re here we
want to also tell you that in accounting the definition of debit and credit is
different from what we use in everyday language I know you guys use your debit
card. Every time you use a debit card it reduces your cash however in
accounting language debit only means the left side of an account and credit means
the right side so we have to retrain our brain to not forget debit doesn’t mean
reduction in cash or credit doesn’t mean a good thing or a bad thing a positive
or negative just means left and right now there as I mentioned there are three
forms you can keep track of an account one is in a column format we used this
one in Chapter one we’re not going to use it anymore what companies actually
use they use standard format we which is this one standard format of an account
has six column a column for the date of the transaction, explanation for the
transaction, a reference column which I come to tell you later why we
use it, left column and a right column so debit, credit and a balanced column
however for educational purposes we don’t use the standard format and we
want to teach you as fast as possible how to show the account so for academia
views a t-account format why is it called t account because if you take a
look at it it reminds you of letter T of alphabet so any account has at least a
title and also a number which is set by accountant and a left side which we call
it debit side abbreviate it also by Dr. period and credit side which is
abbreviated by CR. so any account you look at the left side is always
called a debit, the right side is credit now the question is that how are we
gonna put the numbers from column format into a T-account and also later on in a
standard format so we have to come up with a convention and accountants have
come up with a convention that for any asset doesn’t matter what type what
asset it is we’re going to use the left side or debit side to show the
increases and the right side or credit side to show the decreases in that asset
so if that’s the case then I can say my hundred thousand dollars because it’s
positive should be sitting on the left side or debit side and the negative
numbers or the decreases should be sitting on the credit side so if I
wanted to convert these five items first of all you need a date like you
know January 1st and we’re gonna put that next to the number and for the
$2,000 also we need a date so oh the date comes first
this was January 5th and so $2,000 now does it matter we need if you’re using a
T-account you don’t have to create one row for each amount because it’s an
informal way of showing your increases and decreases then you can basically use
you don’t have to use one line per account per amount so in this
case the five thousand which was on January 10th shows up here and then I
have another thousand that happened on January 11th I’m gonna put it here and
then eventually a negative reduction in cash on the 30th for the 2500 now once
you on a T-account once you have all your numbers entered you need to draw a
line under both side left and right side and then since we know the numbers on
the left for any assets are positive we add them together so hundred thousand
plus hundred six thousand on the left side and we reduce it by the numbers on
the credit side because we know numbers on the credit side for any asset are
decreases and therefore we come up with the balance of a hundred five hundred
one thousand five hundred and we write down the balance on the side that is
larger since the positive numbers were larger than the negative the balance
shows up on the increase side debit side actually the side
that increases an account is called normal balance so normal balance is the
side of the account that increases that account so for assets it’s always the
debit side is normal meaning you always want to have an ending balance sitting
on the debit side if you put it on the credit side either you made a mistake or
something is wrong so now let’s see how to companies actually use their standard
format account. In a standard format account you’re gonna write down an
explanation let’s say the hundred thousand dollar was a contribution from
owner and then we put the hundred K because it’s an asset on the left side
or debit side and we arrive at a balance so every entry in the standard format
account after that entry you have to arrive at the balance because this way
you would know what is for example the amount of cash that we have as of that
date I have these transaction memorized we purchase $2,000 of supplies and we
paid cash now I noticed that in column format we were using negative when we
were using our cash however in the T-account or standard format we will not
use a negative number anymore by the way in accounting any number in parentheses
are considered negative so in this case we’re not going to put negative 2,000 in
here because by convention we know that any number on the credit side of an
asset is decreasing that asset so in this case we know that the balance on
January 5th is 98,000 and let’s say that we provided
services on January 10th and receive $5,000 cash from the client therefore
the balance knob would be the 98 thousand plus the $5,000 or 103 thousand
and then eventually we received a deposit from a customer for $1000 on
January 11th again therefore the balance of cash would be 104,000 and when
we purchased computer now the 2500 because the convention is that for any
asset the reduction goes on the credit side or we don’t have to show it with a
negative number then the balance as of January 30th would be one hundred one
thousand five hundred so that’s the difference between a column format
account, a T-account which we just use it informally for demonstration purposes
for teaching purposes and a standard format account that is used in formal
record of companies all the companies using a standard format account which
has six columns now let’s go over the next part of so therefore we need to
know the convention for other accounts what is the convention for liabilities
for example for liabilities we have decided that we’re going to use the
credit side then the right side for increases when we owe money and a left
side for decreases so whenever you owe money you put the number on the credit
side and when you pay off the amount that you owed you put it on the debit
side so if you look at assets and expenses and dividends they
have the same convention the left side is used for increases and the right side
is used for decreases liabilities, common stock, retained earnings, and
revenues have the same convention meaning the credit column will show
increases and debit column will show decreases now if you want to remember
this convention you can say this acronym after eating dinner
let’s read comics after we eating dinner let’s eat comic let’s read comics after
eating dinner let’s read comics so what does that mean
that means if assets expenses and dividends are increased by debit if you
create a T-account for yourself in here so if this is your T you will see
that the debit side which is the left left side will increase these type of
accounts whereas the liabilities and revenues and retained earnings and
common stock are increased by a credit entry and therefore decrease by debit so
hopefully you will be able to remember this convention because it’s really
important otherwise we’re not going to be able to complete the rest of the
following chapters this chapter and following chapters now there are two
very important documents that we need to go over in Chapter two one of them is
called a general journal and the other one is general ledger and they are used
in the recording process so in a recording process first we analyze
transactions then we journalize them meaning put an entry in general journal
and then we post them to general ledger in the next video I will describe the
recording process if you have any questions please let me know talk to you
soon

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