I’m an accounting beginner, using only online tutorials, and I just ran across something that stumped me: The text said that if I make a sale, I am to credit a revenue account, and debit cash/AR. Wouldn’t a revenue account be an asset, and the sale an increase, which would make it something to be debited?
Thank you,
Greatshakes
No, try to think about revenue as the other side of expense. You have revenues and expenses, assets and liabilities. If you pay a bill, that isn’t a liability (though you are paying off a liability)
The most confusing thing about starting to learn accounting is that “credit” and “debit” don’t really mean what you’d think they mean, based on how you deal with your personal finances. The key thing to know is the basic accounting equation:
Assets = Liabilities + Equity
which can be expanded to
Assets = Liabilities + [(Owner’s equity) + (Revenues - Expenses) - Dividends]
If you shuffle the terms around to get rid of negative signs you have
Assets + Expenses + Dividends = Liabilities + (Owner’s equity) + Revenues.
Think of “debit” as “left” and “credit” as “right”, so when you debit something on the left, you increase it; when you credit something on the right, you increase it. Conversely, if you credit something on the left, you decrease it, and if you debit something on the right, you decrease it.
Since the two sides of the equation have to stay equal, debiting cash (an asset, on the left) means you need to either debit something on the right, or credit something on the left, to keep the equation balanced. A credit to revenue balances a debit to cash.
Thanks for a very succinct and well-written explanation!
I think I already have the part down about right and left, unless I’m more confused that I think. Let me see if I’m with you, or if I’m forcing my own construct on it:
" when you debit something on the left, you increase it; when you credit something on the right, you increase it. Conversely, if you credit something on the left, you decrease it, and if you debit something on the right, you decrease it. "
I think you’re referring to on the left/right side of the equal sign of the acct equation, not on the left/right sides of the T account thingy, do you? I’ll keep going as if I’m correct.
What is confusing me is, where to put the accounts? I’m assuming that I’d be called upon to create some sort of workup along these lines. Or, does it even matter, as long as we have it all balanced, and can give a fair explanation?
Also, I can use any tips for online tutelage.
Thanks, everyone!
Greatshakes
One of the strangest things I had to get used to when I worked for a bank was that the accounts we were running reports for weren’t accounts with money in them, they were accounts with investments in them. Consequently, a sale (e.g., selling stock) was a reduction in value, and a purchase (e.g., buying stock) was an increase in value. To my little checkbook-oriented brain, it was just really strange to see sales as minuses and purchases as pluses.
Right. Although, on a T account, the left hand column is called the “debit” column, and the right hand column is called the “credit” column. So when you record a transaction, you always debit an account by adding to the left column and credit by adding to the right column.
Where to put the accounts? You mean, where you record the figures when performing a business transaction? A lot of small businesses use bookkeeping software like Quickbooks or else some sort of database, or even an Excel spreadsheet. Or am I misinterpreting your question?
ETA (!): I made a mistake in my description above:
“Since the two sides of the equation have to stay equal, debiting cash (an asset, on the left) means you need to either credit something on the right, or credit something on the left, to keep the equation balanced. A credit to revenue balances a debit to cash.”
For instance, say you bought a computer and thus debited an asset called “computers”. To show that you paid for it, you might credit the cash asset (reducing your cash balance), or credit a loan liability (increasing the amount of loan you owe, perhaps on a credit card). Debits always balance credits.
You interpreted the question quite properly.
I think you’ve cleared it up quite well.
Thank You, and everyone else.
Greatshakes
Also, I haven’t read it, but this book was the best-sounding one I could find on Amazon for learning some accounting in an informal but informative way.