@ wrote... (2 years, 7 months ago)

Even after watching a bunch of YouTube videos and reading some websites I still didn't have the foggiest clue on how to actually enter any records in my current accounting software of choice, webzash.org.

In fact I was losing my mind, figuring the two demo programs I was using were both wrong but knowing that couldn't be the case. That's how hard it was for me to wrap my head around these concepts.

So here's how I think this stuff works. It's likely wrong and/or incomplete so take everything I'm about to say with a huge grain of salt.

First Principles

In no particular order, if you understand this stuff you might understand accounting.

Everything is from the company's perspective

Everything you think you know about accounting is probably wrong since you've gone your whole life thinking of it from your point of view instead of from a companies point of view.

Stop thinking about how you've dealt with money your entire life and start thinking about how companies have dealt with money. This is super duper hard at first. At least it was for me.

Zero sum game

Everything in double entry needs to add up to zero. Make sense. Kinda.

If you buy a pack of gum with cash then the global pool of cash goes down and the company coffers go up by the same amount.

  • So money in equals money out.
  • Or 0 = money_in - money_out.
  • Or 0 = money_out - money_in.

Debit vs Credit

protip: debit is abbreviated as 'dr' and credit as 'cr'.

Debit

Here in Canada we have debit cards and credit cards. And they're totally the same right? They both make money disappear and you get stuff in return.

Not so fast.

When you pay for something with debit the money instantly disappears from your account so you're probably thinking debit is a minus money idea.

Nope, debit is a plus money kind of thing from the company's perspective. Again, you have to think from the company's perspective, they've done some debiting and now they've got more money. And you've got less.

  • debit adds money

Credit

When you buy something with credit your credit card balance goes up. I've never understood this. Shouldn't it go down? As in, if I've bought $500 worth of stuff shouldn't my balance be -500 not +500?

  • credit subtracts money

Think of it this way, a massive debit account is a lot nicer than a massive credit account. I don't know a single person that likes having a big credit card balance.

So how is that different from a debit from the previous section? Well, from a companies perspective, when you buy something on credit (via a credit card for example) they've given you some product but have not received any money. What they've received is a promise for money in the future. They've given you something on credit.

An account is marked as either a debit account or a credit account. A debit account is increased with a debit and a credit account is increased with a credit.

Ever see an old western where the down-on-their-luck farmer is at the general store and asks for some flour on credit? Or maybe just think of a credit card and your head will hurt less.

It's all positive numbers

Remember how I just said credit subtracts money? Well in accounting you don't actually subtract money you just make the credit accounts get bigger.

If you say so accountants. This is why nobody invites you to parties.

Two sides to every story

So we know (sorta) that you need two accounts for every transaction. One account goes down and another goes up. Well actually they both go up because we don't subtract. So that means that every transaction needs a debit account and a credit account. And one account needs to be debited and the other credited.

Debit accounts increase with a debit and decrease with credit. Credit accounts increase with a credit and decrease with a debit.

In your accounting software every account is probably the opposite of what you'd think it should be.

For example, assets like savings accounts are a debit account. Makes sense, to increase your assets you debit it. Expenses are a debit account too. Makes sense… No it doesn't!

Example 1

Let say you work for Acme Inc. and go on a business trip. You buy a plane ticket and stay in a hotel and eat in restaurants, etc. So you put all this stuff on your credit card and now the company owes you $1000 in expenses.

debit the credit account by crediting the debit account. wut?

Increase the credit account (debit your credit card makes it's balance go down) by increasing the company account (credit the debit account makes it's balance also go down).

Okay, that was maybe a crap example.

Example 2

Let's say you're a consultant. You have a chequing account (a debit account) and you have a client, Acme Inc. You do some work for Acme and now they owe you $1000.

Make a ledger/account called Acme, and it's a credit account. In a way this makes sense. When you're working for somebody you're basically extending them credit, credit that they'll need to pay back.

So you invoice them and when they pay you create a receipt transaction. You debit your chequing account and credit Acme.

So assuming everything started at zero, your balance sheet will look roughly like

Account           Debit      Credit      Balance
------------------------------------------------
Chequing          1000                   Dr 1000
  Acme                       1000        Cr 1000

Dr1000 + Cr1000 = 0. All is well in accounting land.

In other words

Things that give you money are credit accounts (customers), things that take your money are debit accounts (employees, rent, etc). Your actual cash-like accounts are probably debit accounts.

General stuff

At least in Webzash, the first row in a entry is what is initiating that transaction. So in Example 2, the receipt transaction has Chequing Account as the first row and Acme as the 2nd.

Debit columns is on the left, credit is on the right. That's why some instructions say debit is left and credit is right.

Conclusion

Why is everything so complicated? No idea, but if you know please let me know.

Like I said right at the top, most of this is likely wrong or incomplete but hopefully a know-nothing person has a better chance of explaining this stuff to another know-nothing person.

Category: business, Tags: accounting
Comments: 2
Comments
1.
Christopher @ August 24, 2016 wrote... (2 years, 2 months ago)

One of the few things I remember from my SAIT accounting (read bookkeeping) course is my instructor saying something to like, “Debit means the left column. Credit means the right hand column.” These terms were not related to who was getting or giving money as much as we wanted them to be.

2.
sanme98 @ January 26, 2017 wrote... (1 year, 9 months ago)

Christopher, agreed with you. “Debit means the left column. Credit means the right column.”

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