Posted: 4/14/2011 11:52:00 AM EDT
|
Alright guys and girls,
I am working on some Journals and Ledgers for an accounting class. I am struggling to get this one concept. On a journal (after the accounts) is the debits, and the right is the credits. Why is it that if I receive say $1,200 for a service, I put cash first and debit that 1,200 and then under service revenue I credit that $1,200? I guess what I am having trouble with is why would my cash be debited and credit for service revenue increased? I am thinking about it this way and need to know if I am correct. This is in reference to which one would be first. I look at what was received or paid and what form (cash, or account) I paid that with? Is that correct? |
|
Quoted:
Alright guys and girls, I am working on some Journals and Ledgers for an accounting class. I am struggling to get this one concept. On a journal (after the accounts) is the debits, and the right is the credits. Why is it that if I receive say $1,200 for a service, I put cash first and debit that 1,200 and then under service revenue I credit that $1,200? I guess what I am having trouble with is why would my cash be debited and credit for service revenue increased? I am thinking about it this way and need to know if I am correct. This is in reference to which one would be first. I look at what was received or paid and what form (cash, or account) I paid that with? Is that correct? Not sure how to reply. The debit to cash increases your financial position on the balance sheet. The credit to revenue improves the income statement. This is double entry accounting. Hope this helps. |
|
Because contrary to what banks tell people, a debit increases your cash balance. (as all asset balances)
For P&L accounts, credits are good and debits are "bad". You always hope for a credit balance at the bottom of your P&L, which is the retained earnings amount. So sales are credits, expenses (which includes COGS) are debits. Use this acronym: DEAD Debits increase Expenses Assets Dividends payable You just have to memorize them, really. Debit literally means "left" and credit means "right". The usual meanings that non-accountants use don't apply. (the bank "debited" my account, I have a "credit" card, and so on) The normal balances for each type of account is as follows: Sales - P&L Account - Credit Expense - P&L Account - Debit Assets - Balance Sheet account - Debit Accumulated Depreciation - Balance Sheet Account - Credit Liabilities - Balance Sheet Account - Credit Equity - Balance Sheet Account - Credit Retained Earnings (same as net profit on P&L) - Balance Sheet Account - Credit The reason you list debits first in a journal entry is because that's customary and usual. Any GL system will let you enter credits first if you want, it's no big deal. After you internalize the above, strive to understand the ebb and flow from the P&L to the balance sheet. And then you've got it. |
|
On a balance sheet debits are good. On an income statement credits are good.
I was always told it was called a "normal debit balance" and "normal credit balance". ie inventory and prepaids have a normal debit balance and liabilities and revenues have a normal credit balance. |
|
Quoted:
On a balance sheet debits are good. (excluding Equity) On an income statement credits are good. I was always told it was called a "normal debit balance" and "normal credit balance". ie inventory and prepaids have a normal debit balance and liabilities and revenues have a normal credit balance. With the above exception. |
|
Another clarification that makes this all easier to understand:
For P&L accounts, credits are good and debits are "bad". You always hope for a credit balance at the bottom of your P&L, which is the retained earnings amount.
If you export a trial balance to excel, sum just the P&L accounts and you'll get the net profit. It will be a credit. If you sum the balance sheet accounts, you'll get a debit (more assets than liabilities, considering equity a liability of sorts) which will be the same amount as the above. Makes sense, since the TB needs to balance. You are in a net asset positive position, which is equal to equity. So most ledgers will have an Equity account for prior period earnings, but not for current period earnings. The GL system derives this number with the above method. Sum the accounts and you get your year to date earnings. This is a roundabout way to explaining the balance sheet, but I've often used it with staff accountants and watched the proverbial lightbulb light up. |
|
I have been a public account for almost a decade and I still have to manually write out journal entries sometimes. These are the basiscs, how a balance sheet looks.
Assets - Dr Liabilities - Cr Equity - Cr Revenue - Cr Expenses - Dr Net Income - Cr Always think of it in terms of the balance sheet. If you create an asset (by debiting cash), you have to credit something else on the balance sheet. Your choices are an asset, a liability, or equity. If its not an asset or liability, it must be equity. Well equity is increased by net income (as you can see above they are both credits). When revenue exceeds expenses you get net income. Revenue is a credit. So you would credit revenue thereby increasing net income and increasing equity. Again there are caveats to this but I am sure you arent there yet. Always think of how it affects the balance sheet. |
|
Quoted:
I have been a public account for almost a decade and I still have to manually write out journal entries sometimes. These are the basiscs, how a balance sheet looks. Assets - Dr Liabilities - Cr Equity - Cr Revenue - Cr Expenses - Dr Net Income - Cr Always think of it in terms of the balance sheet. If you create an asset (by debiting cash), you have to credit something else on the balance sheet. Your choices are an asset, a liability, or equity. If its not an asset or liability, it must be equity. Well equity is increased by net income (as you can see above they are both credits). When revenue exceeds expenses you get net income. Revenue is a credit. So you would credit revenue thereby increasing net income and increasing equity. Again there are caveats to this but I am sure you arent there yet. Always think of how it affects the balance sheet. This. Keep in mind that when you are talking to a bank or creditor and they are talking about debiting or crediting your account, they are talking about their accounting, which is the mirror image of yours. So if you are talking to your phone company the amount you owe them is a liability to you with a credit balance, but AR to them with a debit balance. If they issue you a "credit memo", they are reducing (or crediting) their AR balance. The entry in your books would be a debit, or a reduction in your liability. |
|
One could argue that net income is a result, not a balance, on the income statement. That is, you do not post to net income. Just saying'.
Quoted:
I have been a public account for almost a decade and I still have to manually write out journal entries sometimes. These are the basiscs, how a balance sheet looks. Assets - Dr Liabilities - Cr Equity - Cr Revenue - Cr Expenses - Dr Net Income - Cr Always think of it in terms of the balance sheet. If you create an asset (by debiting cash), you have to credit something else on the balance sheet. Your choices are an asset, a liability, or equity. If its not an asset or liability, it must be equity. Well equity is increased by net income (as you can see above they are both credits). When revenue exceeds expenses you get net income. Revenue is a credit. So you would credit revenue thereby increasing net income and increasing equity. Again there are caveats to this but I am sure you arent there yet. Always think of how it affects the balance sheet. |
Here's the "accounting equation" expanded:
Think of it like the rosetta stone of double-entry accounting. Everything on the left of the "=" (and everything after the minus sign on the other side) increases with debits; everything to the right of the "=" increases with credits. If something doesn't make sense, write out this equation and see how it fits together. For your equation: you get cash, cash is an asset, asset to left of "="––> debit cash to show increase you get revenue, revenue is on the right of the "="––> credit revenue to show increase |
|
Think of it this way. Assets = Liabilties + Shareholder's Equity. Now, since the income statement directly affects Shareholder's Equity (net income increases it, while a loss decreases it), the accounting equation can be expanded to Assets = Liabilities + Shareholder's Equity + Revenue - Expenses. Everything to the left of the equal sign holds a debit balance (increased by debit), and everything to the right of the equal sign holds a credit balance (increased by credit, except expenses which hold a debit balance). So when a service is provided for $1200 the journal entry would be this (Dr)......................(Cr) Cash 1200 Sales Revenue 1,200 Look at the effects on the accounting equation: Assets = Liabilities + Shareholder's Equity + Revenue + Expenses 1,200 = 0 + 0 + 1,200 + 0 so, 1200 = 1200, it is balanced. All transactions must balance each out like this. Recognizing revenue is only part of this transaction, you must next recognize the cost of providing this services ( Dr).....................(Cr) Cost of Services (expense) 800 (made up number) Cash or Accounts Payable 800 This explanation helped me when I was in intro to financial accounting eta: I cant figure how to space the journal entries correctly |