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The Greatest Mystery in Accounting

Debits and Credits might be called the greatest mystery in accounting.  Many people think that Credit means increase because they know that the bank "credits" their account when they make a deposit.  It doesn't.  It fact credit means right side.  Debit means left side.

You've probably heard the term double entry accounting.  This just means all transactions have to be in balance.  That is for every credit an equal debit must exist.  Going back to the bank when you make a deposit the bank increases it's liabilities.  Since liabilities are increased by a credit, one of the entries that the bank makes is to it's liabilities account.  To be simple let's assume you deposited cash.  Well that means there is more money in the bank.  Money is an asset.  So the bank debits it's cash account.  Thus the bank is in balance.

Of course througout the day the bank will receive many deposit.  To keep it's simple lets stick with cash.  If the bank summarizes it's transactions at the end of the day it will only need one asset debit, but it will need many liability account credits to keep track of the amount that is owed to each customer.  Thus we see that while debits must equal credits in total amount they can differ in detail.

This transaction type is often represented by what is called a T account.

You've probably heard that assets must equal liabilities plus equity.  Now you know why.

Fortunately, modern accounting software such as Cougar Moutain, Peachtree and Pro take care of all this for you.

If I can be of more help give me a call at:

Phones 909-648-5767 or 702-813-8668

Contact: SBTBILL@AOL.COM

Copyright Bill C. Couture, 2007

 

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