I’m trying to understand “credits” and “debits”. I think I’ve figured out that a “credit” is a negative amount in an accounts receivable file, and a positive amount in an accounts payable file. So if you “debit” an accounts receivable, you are adding money into it that says “this person owes you this much”. If you “credit” an accounts receivable file, you’re saying “I owe this much to this person”. Right?
Do not think of debits and credits as either “positive” or “negative”. Debits are traditionally shown as positive numbers, and credits are traditinally shown as negative. But that should not be confused with their actual purpose. Asset accounts, such as Accounts Receivable, are debited to show an increase in the amount of receivables due, and credited to show a decrease. Liability accounts, such as Accounts Payable, are credited to show an increase in the amount of payables owed, and debited to show a decrease.
Right, so think of as “good” and “bad.” But be careful, because at the bank they use those terms from their perspective so it’s the reverse.
I think you’ve got it Johnny. A debit to your accounts receivable increases the amount of money that is owed to you. I found this was one of the more confusing aspects of basic bookkeeping. I think of it this way.
If you add money to your bank account then your increasing the balance therefor debiting the account.
If you have an accounts receivable balance then you have money that is owed to you. When that money is paid to you, you will debit your money (bank) account by that amount and credit the accounts receivable acocunt by the same amount. So the journal entry would look like this:
Debit Credit
Bank $20.00
Accounts Receivable $20.00
Hope that helps a little, I never was a good teacher.
Okay, a credit card is a liability account, right? That is, there is a ledger (your statement) that says you owe the credit card company X dollars. So if someone debits your credit card, that means there is a decrease in the amount you owe?
Debit - left side of ledger
Credit - right side of ledger
If you pay off part of your credit card balance, it is a debit to that account.
If your savings account at the bank is charged for something, such as using another bank’s ATM, that’s a debit to your account. If the bank did it in error and refunds you the money, they credit your account.
I hope this is right. I did get an A in both my accounting courses in college and my checkbook is always balanced.
Rule of thumb:
In a balance sheet - statement of assets and liabilities at a given point in time:
Debit (DR)
[ul]
[li]An increase in the value of an asset (e.g. fixed assets, cash, debtors or prepayments)[/li][li]A decrease in the value of a liability (e.g. a reduced amount owed to creditors)[/li][/ul]
Credit (CR)
[ul]
[li]A decrease in the value of an asset (e.g. provision for bad debts or provision for depreciation on fixed assets)[/li][li]An increase in the value of a liability (e.g. more creditors)[/li][/ul]
In a profit and loss (P&L) account - a summary of the movement of monies over a set period:
Debit (DR)
[ul]
[li]An increase in the value of an expense (e.g. rent, electricity and many more)[/li][li]A decrease in the value of income (e.g. product returns)[/li][/ul]
Credit (CR)
[ul]
[li]An increase in the value of income (e.g. sales or rent received)[/li][li]A decrease in the value of an expense (e.g. prepayments)[/ul][/li]
When it comes to bank accounts, REMEMBER THIS:
Every company account is prepared from the point of view of the company, not the customer. Hence, if your business makes a cash sale you would credit sales and debit cash. On the other hand, if you pay that money into a bank account, then from that bank’s point of view they owe you more money - so that’s why it’s called a credit to your account. Similarly, when money leaves your account the bank calls it a debit because it’s money they no longer owe you (it’s a decrease in the value of their liability towards you).
mattk nailed it on the “T” account.
Actually, BobT, if you pay off a part of your credit card, the credit card company would actually credit your account. The credit card company views your account as money you owe them (an account receivable - an asset). As mattk posted, assets are debit balance account (let’s leave contra-asset accounts out of this for now), therefore for them to reduce your balance they have to credit it. It reduces the amount of money you owe them. The other side of the entry would be a debit to cash (they received your money)!
Of course, do not confuse credit in “credit card” with accounting’s “credit”. The “credit card” references a line of money they are willing to front you. After a confusing day at the office (I am an accountant) I went to the grocery store and handed the trainee cashier my check cashing card so I could pay with a check. She must have not seen my check book and asked, “Debit or Credit”? I stared at her for a moment as my brain ran through the entire transaction… credit your sales, debit your cash, credit my cash, debit my grocery inventory… until she smacked her bubblegum a couple of indignant times and I realized what she was talking about. It had been a bad day…
Regards.
Fortunately, I always pay off my balance so my ignorance of whether my credit card payments are debits or credits is not that important. 