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4 min 48 sec
0:00
In credit, or not?
0:24
Debit means left
0:52
Which side goes up
1:51
Maya's five, properly
2:34
Reading a T account
2:54
Why your bank says credit
3:14
Manual journals in Beeswax
3:51
Recap and quiz
Accounting 101
·
Foundations
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Episode 3
Debits and Credits
(Left and right. That's most of the trick.)
Debit means left and credit means right. Redo Maya's first five transactions properly and find out why your bank says you're in credit when you have money.
debits
credits
t accounts
manual journals
Transcript
0:00
Your bank says you're in credit. Lovely. That means you've got money.
0:04
Your accountant says, credit the bank account. Which, it turns out, means the money's going out.
0:11
Same word. Opposite meaning. And that, right there, is why people give up on accounting.
0:17
Today, we fix it. It's easier than you think. Slightly.
0:24
Here's the secret. Debit means left. Credit means right. That's it.
0:31
Not good. Not bad. Not plus, not minus. Left, and right. You'll see them shortened on screen, because saving a few letters is the most excitement we get.
0:43
Every account can be drawn as a T. The name goes across the top. Debits down the left. Credits down the right.
0:52
So which side makes an account go up? It depends which side of the equation it lives on.
0:58
Assets sit on the left of the equation. So assets go up on the left. With a debit.
1:04
Liabilities and equity sit on the right. So they go up on the right. With a credit.
1:10
Income adds to equity, so it behaves like equity. Credit. Expenses eat into equity, so they do the opposite. Debit.
1:21
There's a handy way to remember all this. Dead click.
1:25
Debits increase expenses, assets, and drawings, which is the owner taking money out. Credits increase liabilities, income, and capital. It's not elegant. But you'll never forget it. Sorry.
1:40
And the golden rule. In every single entry, the debits equal the credits. Always. You may notice a theme developing.
1:51
So let's redo Maya's first five transactions. Properly, this time.
1:56
She puts in ten thousand. The bank account, an asset, goes up. Debit bank. Her capital goes up. Credit owner's capital. Ten thousand, each side.
2:08
She borrows five thousand. Debit bank. Credit loan.
2:13
The laptop. Computer equipment goes up, so that's a debit. The bank goes down, so that's a credit. Three thousand.
2:22
The cafe pays her two thousand. Debit bank. Credit services income.
2:27
And the software. Debit software, an expense. Credit bank. Five hundred.
2:34
Now look at the bank account's T. Seventeen thousand of debits on the left. Three and a half thousand of credits on the right.
2:41
The difference is thirteen thousand, five hundred. Exactly what Maya's got in the bank. The T just told us her balance. Which is more than the T usually gets credit for.
2:54
So why does your bank say you're in credit, when you've got money? Because your bank statement is written from the bank's point of view.
3:02
To them, your money is something they owe you. A liability. And liabilities go up with a credit. So it's not you. It's them.
3:14
In Beeswax, a manual journal looks exactly like this. Pick an account, then put the amount in the debit column, or the credit column.
3:24
Beeswax totals both sides as you go, and the save button stays switched off until they match. You simply can't save an unbalanced journal. It's like having an accountant looking over your shoulder. Without the breathing.
3:38
Most of the time, you won't write journals at all. Invoices, expenses and bank transactions create them for you, behind the scenes. But now you know what's going on in there.
3:51
Right. Debit is left. Credit is right. Assets and expenses go up with a debit. Liabilities, equity and income go up with a credit. And both sides always match.
4:07
Quick one. Maya sends a client an invoice for four thousand. They'll pay next month. What's the debit, and what's the credit?
4:15
Have a think.
4:19
Debit trade debtors, an asset, because the client owes her money. Credit services income. Four thousand, each side.
4:30
If you got that, you're doing better than plenty of people who've been in business for years. Don't tell them.
4:38
Next time: the journal and the ledger. Where all these entries actually live. It's more interesting than it sounds. We've said that before.