Bennett’s first law of economics:
If your outgo exceeds your income, your upkeep will be your downfall.
Balance sheet and Debits – Clear the Confusion
There’s an old story about an accountant who was never out of balance for 30 years. Every morning, he would unlock his desk drawer, look in it, and then lock it. Needless to say, his coworkers were consumed by curiosity. When he retired, they couldn’t wait to see what the secret was. Inside his drawer, was a note that said, “Debit side is the side nearest the window.”
Sometimes the term “debit” can be confusing. Sometimes they mean an increase and sometimes they mean decrease. So here goes.
The balance sheet shows 3 categories. Items on the left side show what you own. Assets, such as cash, accounts receivable, equipment, land, and buildings. Debits increase assets. Credits decrease assets. For example if you deposit cash, you debit cash (increase the cash account) and credit (increase) either a liability or equity account. A credit to cash decreases cash and the offset would debit (decrease) a liability or equity account.
The right side of the balance sheet shows who owns the assets. You or the creditors, or the owners of the company. This side is divided into two categories – liabilities and equity.
Liabilities – If you borrow from the bank. Liabilities would be increased (credited) by the amount of the loan, while cash would be increased (debited) by the same amount.
Equity – If you contribute cash from your own pocket to the company, you debit (increase) cash and credit (increase) owner’s equity.
Some of the confusion arises when talking about your account at the bank. It seems that the entries are just the reverse of your company account. The reason for this is you are talking about how your account is handled by the bank. Your account is treated by the bank as a liability. It’s your money, after all, not the bank’s. When you deposit cash in your bank account. The bank debits cash and credits your account as a liability. So you see, it all makes sense after all.
Confusing question like this can be answered by your accountant. I offer core accounting services for entrepreneurs and small businesses and would be happy to provide a free inspection of your books.
Contact information: David Bennett, 801 292 4386, email@example.com