Debits and credits: very basic intro

[tesu-acct-student]

It is tempting to think of debits and credits as "positive and negative," or "plus and minus." I don't recommend thinking of them that way because that pits them against each other. Debits and credits are not pitted against each other, as if in a battle. Instead, think of them as a unified whole. Here is what I mean.

I suggest thinking of debits and credits the way you think of a coin, as heads and tails. Every coin has both sides, a heads side and a tails side. The coin is not complete without both sides. It is the same with debits and credits.

When you purchase a piece of penny candy, for example, you use a penny which has a heads side and a tails side. You wouldn't be able to use a penny that only had a head or a tail. The merchant wouldn't accept it and you wouldn't get your candy.

Every accounting transaction has two sides, like a coin. When you purchase groceries with a debit card, for example, the "heads" could be thought of as the amount that gets subtracted from the Income Statement. The "tails" is the amount that gets deducted from your checking account. Those are the two sides of the single transaction. The heads and the tails ALWAYS equal each other.

Transactions can get more complex, but the debits and credits will always equal each other. For example, let's say that you went to the gas station to purchase gas with your debit card. You go into the store to pay, and you decide to buy some snacks while you're in there. The fuel charge ends up being $20 and the snacks are $5. How would this get recorded?

The "heads" is split into two amounts, $20 gets recorded into the Fuel account on the Income Statement, $5 gets recorded in the Food account on the Income Statement. The "heads" is $20+$5, which equals $25. The "tails" gets recorded as $25 deducted from the checking account. The heads and the tails equal each other.

As a visual aid, I recommend taking a piece of cardboard or a piece of paper, and cutting it into a circle that is maybe 3 or 4 inches in diameter so that it looks like a coin. One one side, write the word Debit, then write the word Asset under it. On the other side, write the word Credit, then write the words Liability and Equity under it. Use this as you study these ideas, and especially when you practice how to record different kinds of transactions. I made up this visual aid for myself a long time ago and found it helpful. This is the first time I've shared it with others though, so I don't know if it will be helpful for others. Let me know how it works for you.

I need to go now, but let me know if you have any questions.

[Mamasaphire]

Thank you for sharing! I never thought of it that way before.

[dfrecore]

That's an interesting way of looking at it. I always go back to the old "T" accounts, and journal entries.

One thing I always liked about accounting was that when all was said and done, both sides always had to equal each other. If you were off by even a penny, you figured out what the problem was, and made sure it all worked. Very clean. A good feeling of completion. It all got wrapped up with a nice bow at the end of the month.

[tesu-acct-student]

T-accounts are great. I'm just trying to give newbies a holistic sense for how debits and credits fit together. My hope is to give them an intuition for it first, then address some of the more technical aspects.

[bghill]

As a visual aid, I recommend taking a piece of cardboard or a piece of paper, and cutting it into a circle that is maybe 3 or 4 inches in diameter so that it looks like a coin. One one side, write the word Debit, then write the word Asset under it. On the other side, write the word Credit, then write the words Liability and Equity under it. Use this as you study these ideas, and especially when you practice how to record different kinds of transactions.

But wait, there are debits and credits on both the Asset and Liability+Equity sides of the balance sheet -- isn't that somewhat misleading to label the coin that way?

Nevertheless, a very interesting conceptualization.

I take you are, or are hoping to be, in the educational field?

[tesu-acct-student]

But wait, there are debits and credits on both the Asset and Liability+Equity sides of the balance sheet -- isn't that somewhat misleading to label the coin that way?

No, it is not misleading. Please reread the subject line of this post.

This isn't a thread for people who already get it. It's a thread for those who struggle. [smh]

[bghill]

OK. I guess I've misinterpreted. To me, the labeling of the "coin" seemed to imply that debits=assets and credits=liabilities+equity

[tesu-acct-student]

OK. I guess I've misinterpreted. To me, the labeling of the "coin" seemed to imply that debits=assets and credits=liabilities+equity

I will try to answer your question (it was a question, yes?). As per my objective, I will speak as broadly as possible. My intent is to convey as broad a picture as I know how to convey in order to solidify the general concepts.

The words "debit" and "credit" can be used in more than one way. They can be used as nouns, as verbs, or as adjectives. Generally, verb and adjective are mostly used. Noun is less common, or at least used at more advanced levels. Here are examples to show what I mean.

Verb example: when making a journal entry, we might say something like this, "Debit the cash account for $1500, and credit Accounts Receivable/Jones Company $1500." This would mean that Jones Company paid the money that it owed to us.

Adjective example: there are two types of balances in accounting:

1. debit balance
   
2. credit balance
   

All of the accounts in the COA (and financial statements) have one of those. Each account can be referred to as a "debit balance account," or a "credit balance account."

Assets are "debit balance accounts," because their normal balance is debits.

Liabilities and equity are "credit balance accounts," because the normal balance is credits.

Here, the words "debit" and "credit" are being used as adjectives to describe the type of balance each account in the COA has.

Noun example (not super common, more advanced usage): "This journal entry won't balance because there are too many debits or not enough credits. I need to reduce the debits or increase the credits to get it to balance."

Bonus question: based on this information, which of these did I intend for the coin visual aid?

[bghill]

Thank you! That makes things much clearer to me.
I see that I was thinking verb-ishly, while you were work adjectively.

[Synicaal]

Assets are "debit balance accounts," because their normal balance is debits.

Liabilities and equity are "credit balance accounts," because the normal balance is credits.

This is what I though you were talking about when I read the original post. I am not a newbie however. Overall great post for people looking for an easy way to break down accounting to start getting familiar with it. I learned a bit different. Every time I ran into a new account I would make up a flash card. I would take the account name and put in on one side. On the other side I would put all the information pertaining to that account.

For Example - Accounts Receivable" - Reported as an Asset on the Balance Sheet, Debit Balance Account

Okay site for quick learning - Debit/Credit Cheat Sheet