From the course: Advanced Bookkeeping Techniques

Two things to remember for debits and credits

From the course: Advanced Bookkeeping Techniques

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Two things to remember for debits and credits

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- The basic rules of accounting debits and credits originally arose from the need to add up columns of numbers, some being increases and some being decreases. - [Man In Red Shirt] To illustrate, take a look at this column of numbers. Okay, I can see the numbers plus 4,000, plus 750, minus 2200 on down through plus 400 minus 830. - [Man In Blue Shirt] Okay, add 'em up. - This column of number? - That's right. Just add 'em up manually. Just pencil and paper. No computer, no calculator. Just you and the numbers. - Oh, okay. I could do it. But the first thing I will do is separate the numbers into the positives and the negatives. - Exactly, many people are going to separate the numbers into two separate columns, one on the left side of the page, and the other on the right side of the page. This is exactly what people did hundreds, probably even thousands of years ago. Positive amounts on one side of the page and negative amounts on the other. Now, let's just invent some labels. Debit, write the number on the left side of the page. Credit, write the number on the right side of the page. - We are now ready to summarize the rules of double entry debit and credit bookkeeping. - [Man In Blue Shirt] Record increases in assets on the left side. Left side is given the label debit. - [Man In Red Shirt] Liabilities and equities are the opposite. Right side is given the label credit. - All the other sub rules regarding debits and credits with respect to assets, liabilities, and equity can be easily derived from these two rules. - The key point here is the following. This is not complicated. This is not a bunch of memorization. Just memorize these two simple rules. One, assets go up on the left, and two, liabilities and equities are the opposite. - These two rules can be used to fill out all of the debit credit directions for assets, liabilities and equities. - [Man In Red Shirt] Assets go up on the left. So logic tells us that assets go down on the right. - [Man In Blue Shirt] Liabilities and equity are the opposite. They go up on the right, so logic tells us liabilities and equities go down on the left. - Just memorize the two rules. One, record increases in assets on the left side. And two, liabilities and equities are the opposite. - Now, the debits and credits for revenues, expenses and dividends are where we have found that students often get confused. - [Man In Red Shirt] The key point here is as follows. Revenues, expenses and dividends are sub categories of retained earnings, which is an equity account. - [Man In Blue Shirt] Revenues cause equity to increase, so revenues are always recorded with credits. - [Man In Red Shirt] Expenses and dividends cause equity to decrease, so expenses and dividends are always recorded with debits. - That's it. Those are the rules for debits and credits. Now, about that column of numbers, did you get the total? - Absolutely. The positives add up to 14,250 and the negatives add up to 13,945. Total, 305. Debits and credits, a simple matter of systematically separating the positives and the negatives.

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