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Thanks Cameta, glad it helped.
thank you so much for creating this page it was most helpful
it is good to learn
As someone not versed in Accounting, this was a wonderful write-up, and a joy to read! This should be the benchmark of knowledge sharing, cos I learnt more in 5 minutes, than I probably would have in hours/days on a book or searching the web. Thanks for sharing! It truly was better explained. I shall be looking out for future articles of yours!
I think its important if you are following the “debit the account that receives, credit the account that gives” rule to remember that you are talking about “value” not just money, although everything is expressed in money terms. This is something that is not always well explained in book keeping courses. I think this is why you use the word “stuff”.
For example a debtor is someone, usually a customer, who has received value (not money) so he owes value in return (money). So you credit sales for giving value and debit the customer for receiving value. He now owes you and will pay you in money. Then you debit cash or bank, and credit the customer.
A creditor is someone, usually a supplier, who has given value (not money) so he is owed value in return (money).
An expense is (seemingly paradoxically at first until you think about it) a receiving of value by the business in the form of eg. Stationery, postage stamps, petrol, repair services. Value comes into the business.
Items on the Profit and Loss account represent value given and received where there is no residual value at the end of the year. The stationery is used up, the stamps are licked, the petrol burned, etc. The goods that are sold go out and you don’t see them anymore. Goods purchased for resale are gone. (If any are unsold they go onto the balance sheet as stock in hand)
So the Profit and Loss account is really historical information. At the end of the accounting year, all that historical information is cleared out and you start again with a clean sheet. All that is left is the profit that was earned and it is already on balance sheet.
When you acquire an asset eg a motor vehicle the Motor Vehicles account is debited because it has received value. But that value is not (all) used up in the year. It stays on the balance sheet, and at the end of the accounting year the closing balance becomes next year’s opening balance because all those items still exist. The balance sheet tells you what you still have. It is a snap shot of the value of the business, of the stuff that is still there at the end of the year.
So I think this one general rule can help you with any transaction.
PS
I meant to add that modern accounting systems make it easy because the debits and credits go on in the background. When you click “create a sales invoice”, it credits sales and debits the customer you choose. Etc.
@YatharthROCK: Thanks!
On the comments, I’ll have to check out my anti-spam plugin, it might be going haywire. I should also enable Markdown for comments, thanks!
Wait, aren’t the comments parsed using Markdown? Shouldn’t anything between underscores be in italics?
And what’s with the “You’re posting comments too fast” message? It’s been over 2 minutes.
i don’t understand bank reconciliation statement
Am a second year student now studying finance, and I still feel it really difficult over the course of 2 years now the basics of accounting slowly drifted away from me. But this really helped…
I just wanted to know. I’m meant to help out a friend of mine who has a doctors surgery with her accounts… Is there any tips you have in helping me go about it? Please it will be much appreciated :). This is the first time I had to step out of campus to actually put all my knowledge to use and I really just don’t know what to expect . And what’s expected of me …
I understand assets=libilities + onwers equity much better, but I’m still not sure of the balance sheet and how it works.
balance sheet is like a piece of cake wow…
I’m a little confused with ref to the end of the year balance that l give to my accountant. Do l carry that balance over to the the start of the next business year, even though l still have to pay my corporation tax and accountant from it. If l do then how is it separated so that l do not pay corporation tax on the remaining balance ( after corporation tax ) the following year. I find this part confusing?
hey, can you please explain to me how balancing the books work. I don’t understand when an item fall under the debit or credit side.
WOW! I read the comments after I posted my question. THANK YOU AMY, u saved me a whole lot of trouble. I really didn’t understand what was going on there, didn’t know what went where and when. Thanks a bunch.
Can the money someone owes you be considered as a balance?
I have a masters degree in finance and one of my early key insights into accounts was:
“Debit” is derived from an Italian word which means “left”
“Credit” simply means right.
So if a thing is to be debited - you are writing it on the left column of a accounting table and writing it on right for things to be credited.
Now this is nothing more than an agreed convention so that we all are on the same footing when reading a financial statement.
Then over the periods these conventions solidified into rules like:
If asset increases/ liability decreases - write it on the left (debit)
Incur an expense - write it on the left (debit)
Asset decreases/Liabitlity Increases - write on right (credit)
Get an Income - write in or right (credit)
Obviously nothing increases/decreases one-sided.
If asset increases, you pay for that asset - so some other asset (cash) decreases - so we have to write one part in the debit side, another part in the credit side.
The trouble with most new students is that they start assigning some meaning to ‘credit’ or ‘debit’ thinking one is good another bad or thinking one as increase, another as decrease.