Debits and credits explained
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- Опубликовано: 1 авг 2024
- Debits and credits made easy! I guarantee that you will understand the accounting term debits and credits once and for all after watching this video! Debits and credits are part of the #accountingbasics that you MUST understand.
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0:00 Introduction
0:12 Debit on the left, credits on the right
0:45 Debit and credit for balance sheet accounts
1:12 Debit and credit for income statement accounts
1:32 Debit and credit journal entry examples
3:16 Debit and credit net income
A related video on debits and credits, using DC ADE LER to explain it, can be found at • Debits and credits DC ...
How do debits and credits work? Does a debit increase an account, and does a credit decrease an account? Or is it the other way around? What are the rules of debit and credit? That really depends on the type of account we are looking at.
For balance sheet accounts, we essentially have three types of account. Assets accounts, where the natural state is for an asset account to have a debit balance. Liability accounts, where the natural state is for a liability account to have a credit balance. Equity accounts, where the natural state is for an equity account to have a credit balance. Assets increase with a debit. Liabilities and equity increase with a credit.
For income statement accounts, we have two types of account. Expense accounts, where the natural state is for an expense account to have a debit balance. Revenue accounts, where the natural state is for a revenue account to have a credit balance. Expenses increase with a debit. Revenues increase with a credit.
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers finance training in various formats: RUclips videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
Well explained, but nobody ever explains the WHY. It has to be a reason why this system works this seemingly unintuitive way. What exactly does "Credit" and "Debit" mean??? Is there anybody in this world who knows?? I don't think the guy who invented this system chose this randomly, IT HAS REASONS. And I need to know them.
Hello Juan! I suggest to research the work of Luca Pacioli. I have a brief section on him in my video on the history of accounting ruclips.net/video/HAL0sBd9oyg/видео.html It might be good to read his original works.
Oh my goodness! Thank you for this comment! The WHY is what I have been looking for.
Hayley Carmona does it actually
@juan , same here.. Did u find out??
Because all we receive is from another entity. Is a universal law
So in simple words, businesses are always looking forward to increase credits and decrease debits. I have adhd so it’s harder for me to understand things. Thanks so much for this video 😊
Hello! There is a bit more to it than that. In the income statement (sometimes called profit and loss statement or P&L) we indeed like credits and we don't like debits much. When a company sells something, you record a credit in revenue (a P&L account) and a debit on the balance sheet (in accounts receivable, part of assets). When you record an expense, for example for maintenance, you debit maintenance expense in the P&L and credit accounts payable (in the category of liabilities) on the balance sheet. Have a look at my short video on T-accounts, a technique for making this very visual ruclips.net/video/f1TDNhuPJLc/видео.html Or go through my short story of the business and accounting steps in starting a business ruclips.net/video/wZdaVEX41WQ/видео.html Hope these help! Let me know.
Took me years to finally understand this concept. I always just memorised it but could never really get it. I got an A+ in Advanced Financial Accounting last semester. This video set the foundation for me to get there. The way you set it out is great for visual learners. Thank you so much!
I am so happy to hear that, Olaf! Amazing that you "conquered" the concepts, and got an A+ result. The payoff is there for those that stick with it!!!
@@TheFinanceStoryteller thank you so much
I so love the analogy of the ship and the clear visualization of the credit and debit tables. Thank you so much.
Great to hear that, Winatcha! Enjoy using your new knowledge on debits and credits. More related videos in the Accounting 101 playlist: ruclips.net/video/b93KBmcXanI/видео.html
Clear explanation! The visuals were very helpful. Great resource for business owners to recall that accounting class you slept through in college.
Great to hear, Marty! Yeah, accounting suddenly becomes interesting when it concerns your own business.....
Lots of exciting and helpful new videos coming up! Be sure to click the like button, subscribe and turn on notifications to ensure you don't miss anything. Watch the related video on the accounting equation ruclips.net/video/OYql7Y9NnBg/видео.html and the video on making journal entries using double entry accounting (with examples!) ruclips.net/video/EibibVFEkvk/видео.html or my latest video explaining debits and credits ADE LER ruclips.net/video/b93KBmcXanI/видео.html
Goodness THANK YOU ! the visuals are super simple and effective and your voice helps seeing that my teacher is half asleep trying to muster out a damn letter, that was great for a change. T H A N K YOUUUU!
Happy to help! Please share with fellow students. 😊 Related concepts can be found in my Accounting 101 playlist: ruclips.net/video/OYql7Y9NnBg/видео.html&pp=gAQBiAQB
1:06 This little sentence helped me understand the whole thing. Thank you !
Love it! So happy to hear that. I recently made a follow-up video on debits and credits using ADE LER, that seems to be a good way for some people to remember the "sign" of the accounts as well: ruclips.net/video/b93KBmcXanI/видео.html But once you get it.... you get it! :-)
Thank you so much for this helpful video man. I read my chapter in my textbook and still had a hard time understanding this before my exam but I watched this short clip and understood right away! Passed my first exam with a 76% thanks to this video. Much appreciated 👍
Wow! Well done. Great to hear that, Christian! Thank you for sharing this. And well done for going beyond your textbook and looking for more information to learn about a topic. That will get you very far! Hope some more videos on my channel can help you at some point. Please tell your friends about the channel. ;-)
Very clear. The illustrations helped a lot. Thank you!
Happy to help! Please subscribe, and spread the word about the channel.
super helpful, have seen a couple different accounting channels try to explain this to me now. By far the most comprehensive one!
Thank you, Clinton! That is wonderful to hear. Related topics are covered in the Accounting 101 playlist: ruclips.net/video/b93KBmcXanI/видео.html Enjoy!
Super helpful video. Finally understood the difference between the nature of debits and credits. Thank you!
Great to hear that, Ananta! Hope this insight helps you for many years to come.
Thank you so much for making this video. Really helpful...an engineering guy doing managerial finance for the first time.
Your video has helped me to understand the golden rule.
Glad it was helpful! As a next step, I would suggest my "finance basics" (5 big ideas) video ruclips.net/video/iR7b2NjgAO8/видео.html and any of the finance case study videos of well-known real world companies ruclips.net/video/J_1F8GoLOI8/видео.html&pp=gAQBiAQB
Thank you for a very clear explanation which will help my students understand debits and credits.
You're welcome, Naomi! Happy to help! Feel free to have them browse through the videos and playlists on my channel, there are topics ranging from basic to advanced. For example, I think the video on balance sheet and income statement relationship can be very useful too: ruclips.net/video/wZdaVEX41WQ/видео.html
After having trouble for 2 weeks, you finally made it click with me. Thank you very much!
So happy to hear that, Daniel!!! Glad I could help! Videos on related topics can be found in the Accounting 101 playlist: ruclips.net/video/OYql7Y9NnBg/видео.html&pp=gAQBiAQB
Please consider supporting the channel through a membership: ruclips.net/channel/UCQQJnyU8fALcOqqpyyIN4sgjoin
I need a refresher on accounting. I think this will do nicely. Thank you.
More Accounting 101 videos in this playlist: ruclips.net/video/b93KBmcXanI/видео.html Enjoy!
Thank you so much. I am just learning the basics of accounting at uni and I always thought that Debit always meant increase and Credit always meant dicrease which left me confused all the time. This cleared up so many things for me.
Hello Giorgi! Happy to help. :-) I hope you will find many more useful videos in the Accounting 101 playlist: ruclips.net/video/b93KBmcXanI/видео.html
This was the clearest description of credit and debit accounts.
I am so happy to hear that!!! Thank you. :-)
cap
Well explained. Thank you.
You're welcome! Very happy to hear that, Mohammad!
Very nice, I learned some new things.
Glad to hear it! Videos on related concepts can be found in the Accounting 101 playlist: ruclips.net/video/OYql7Y9NnBg/видео.htmlsi=CxJ1ZjpfyVkKfcEV Hope those are helpful as well.
Thank you for the knowledge that I learned from your video.
My pleasure! Related accounting topics in this playlist: ruclips.net/video/b93KBmcXanI/видео.html
thank you for this video!) Brilliantly explained
Glad it was helpful! 🙂
The reason why is video explained it so clear as it implies the principle of destination and source. Many textbook makes it complicated.
It will be much easier if they explain that if the left side of equation increases so does the right side.
All the examples in this video tried to illustrate this.
If a part of a side of equation increases without an increases on the opposite sied of the accounting equation, there must also be a decrease on a different part on the same side of the equation which that part increases.
For example, a bank deposit receipt will illustrate an entry to debit cash (increased) and credit Accounts Recivable (decreased).
Both cash and account recivable is considered assets account.
So one increased the other must decreased.
This is an awesome video.
Thank you so much for the kind words!!! You are on the right track. 🙂 This playlist ruclips.net/video/b93KBmcXanI/видео.html might have more videos that are of interest to you. Wishing you lots of success!
Why and where are you learning about debits and credits? Let me know by commenting below!
I am starting accounting school and I want to give myself a little bit of a head start! My husband likes to learn about finance for fun and he has been watching your videos for months. He showed me your channel and you do such a fantastic job of explaining these concepts! Thank you!
@@hannahsharma5108 Thank you so much for the kind words, Hannah! So happy that both your husband and you are enjoying the videos. Great that you are getting a headstart on your accounting education. I hope the videos in my "Accounting 101" playlist help you a lot: ruclips.net/video/b93KBmcXanI/видео.html And once you get a grip on these, there is an intermediate accounting playlist as well. Let's take it step by step, one day at a time!
Thanks for this video! Just started a financial accounting class in an MBA program.
@@xcdom324 Welcome! I have several playlists that can give you a headstart on the topics:
accounting 101 ruclips.net/video/b93KBmcXanI/видео.html
finance case studies ruclips.net/video/PI9X5Ybek_E/видео.html
I am a student in a british school....It really helped alot.....Thank You
Finally! Thanks!
You're welcome! Happy to hear that.
Thank you very helpful
You're welcome! Here's the link to a companion video on double entry accounting: ruclips.net/video/EibibVFEkvk/видео.html
Sooo helpfull! I have been trying for ages to find a explanation of debits and credits and this video makes perfect sense!! Thank you
Sooo happy to hear that! :-) You're welcome. If you enjoyed this video about debits and credits, then the related one on double entry accounting might be helpful as well: ruclips.net/video/EibibVFEkvk/видео.html
Great job.
Thank you! :-)
Great video thanks alot
You're welcome! I have a lot of videos for you to discover on the Finance Storyteller RUclips channel in the fields of finance and accounting. :-)
THANK YOU THANK YOU THANK YOU 🎉
Happy to help, Mitchell!
Thanks. Really helped me
Glad to hear it! More videos on related topics in the Accounting 101 playlist: ruclips.net/video/b93KBmcXanI/видео.html&pp=gAQBiAQB
Thank youu!!
You're welcome, Kingiv!
Excellent teacher
Thank you! 😃
really helpful thank you!!!
Glad it helped! Once you get it, a whole world of accounting bliss opens. ;-)
Thankyou so much 🙏
Always welcome, Vikas!
Amazing!
Thanks! Videos on related topics can be found in my Accounting 101 playlist: ruclips.net/video/OYql7Y9NnBg/видео.html&pp=gAQBiAQB
You guaranteed I'd understand what debits and credits mean and you did not lie!
Nice to hear that, Anna! More related "Accounting 101" videos in this playlist: ruclips.net/video/b93KBmcXanI/видео.html
Awesome vid
Nice to hear that, Jos! Thank you. More Accounting 101 videos in this playlist: ruclips.net/video/b93KBmcXanI/видео.html
thank you
You're welcome!
Thanks!
Happy to help! Videos on related topics in this playlist Accounting 101: ruclips.net/video/b93KBmcXanI/видео.html&pp=gAQBiAQB
best i've seen
Thank you! That's a compliment I love to hear. :-) Have you checked out the rest of the Accounting 101 playlist? There might be more useful stuff in there for you: ruclips.net/video/b93KBmcXanI/видео.html&pp=gAQB
This system seems to confusing and self contradictory I don’t think I’ll ever be able to wrap my head around it
Don't worry, you will get there, it's mostly a matter of accumulating some mileage. See also the sequel on debits and credits DC ADE LER ruclips.net/video/b93KBmcXanI/видео.html and T accounting ruclips.net/video/f1TDNhuPJLc/видео.html
Agreed. It's completely backwards.
And the only explanations involve assuming certain things are credit or debit based and just accept it.
It's like they expect you to have faith and then it will feel right. Is accounting a religion ?
An asset is assumed to be a debit ? That's just dumb. An asset has value. Credit means add value so to increase the value of an asset you should add credit.
It's not like you can add debit....that's an oxymoron. Or am I ?
Tell me if I'm wrong. A easy trick is, make a cash account which is created outside the business. When we pay them in cash, we Debit the amount in our business a/c. And when we receive cash from them we Cr. that amount in our company ac. At the same time we mention their cash account and put the value in the opposite coloum. So main account is our business account, rest is all outside account including our personal account.
Not sure what you are trying to achieve here. Any bank account that belongs to the company has to be included in its accounting records. If it's an account belonging to the owner, then the connection is through the current account with the owner.
Thnkuu sir
You're welcome!
1:13 Income statement account
May I ask what is the double entry for me buying sth on credit, or someone buy my things on credit, and why. I tried to remember the double entries but I cannot understand so I keep forgetting. This subject is so difficult I can't even understand the basical things TT
Hello Zara! Yes, this subject needs a bit of practice. I have actually just published a video today with another perspective on debits and credits, including an example of a company buying inventory from a supplier, for which they receive an invoice that does not have to be paid immediately. Please take a look and see if that answers your question: ruclips.net/video/b93KBmcXanI/видео.html
great video.can u pls add, why we call it debit and credit? WHat is the meaning?
Hello Lional! I looked for some background on the words debit and credit, and there seem to be several competing explanations. Most likely it has either latin or Italian roots, and dates back from the early Renaissance. See also my video on the history of accounting: ruclips.net/video/HAL0sBd9oyg/видео.html
@@TheFinanceStoryteller Thanks
I get confuse with the debit and credit with bank accounts as well for some reason It tend to mix up and I end up confused
Help is on the way in the form of this playlist: ruclips.net/p/PLKbmcnUUQMlnWPLx9IeS-cYec2r7GzJ3S Remember, banks send you a statement thinking from their side. So if you have a credit balance on your account, this is viewed from the bank's relationship towards you: the bank owes you money, hence a liability for them.
I have a doubt. Why equity should go on the credit side? Equity has been received, so it should be on the debit side right?
On the balance sheet (at least in Europe and US), we put what we own on the left-hand or debit side (assets), and what we owe on the right-hand or credit side (liabilities and equity). If shareholder provide equity to a company, then the debit part of the entry is cash (in the assets section), and the credit part of the entry is equity (the certificates of ownership showing that we owe the capital back to the shareholders). For more information/discussion of the steps, see my video on the relationship between income statement and balance sheet: ruclips.net/video/wZdaVEX41WQ/видео.html
Thank you so much Sir .I have benefited greatly.
★i'm Habibur Rahman (রাফি). Student of Dhaka international University. Department of CSE.★
You're welcome! Greetings back to you from the Netherlands. Hope you will find many more helpful videos on my channel.
👏👏👏
:-)
✨❤
👍
Great video , very clear, but I have a question, in @2:42 the assets is credit and the liabilities are debits, how come, I thought all assets are debits and all liabilities are credits, thank you.
Good question, Marwan! The natural state for an asset is to have a debit balance, booking a credit to assets in a journal entry (partially or fully) decreases that debit balance. The natural state for a liability is to have a credit balance, booking a debit to liabilities decreases the liability. Remember that in an earlier step in the video, the liabilities were credited when we booked an invoice from a supplier. Recording a debit once that invoice gets paid decreases (or even fully cancels out) the liability. Similar story for assets. They got a debit (increase) when we raised cash earlier, now we are using the cash to pay an invoice to a supplier, so the asset needs to decrease (by booking a credit to the account). I think you will enjoy the video on the accounting equation ruclips.net/video/OYql7Y9NnBg/видео.html and double entry accounting as well ruclips.net/video/EibibVFEkvk/видео.html Similar stories, but explained in a different way.
@@TheFinanceStoryteller Thank you for explaining, now i got it ^_^, and yes I did enjoy the other 2 videos :).
You're welcome! Let me know which other topics you would like to have covered on my Finance Storyteller channel.
@@TheFinanceStoryteller Will do my dear sir.
Can someone explain how debit and credit increase
Economic transactions drive accounting entries. For example, if my company buys $100K worth of raw material from a supplier on 30 day credit terms (the economic transaction), then I record in my accounting system debit Inventory $100K, credit Accounts Payable $100K. Both my assets (debit) and my liabilities (credit) increase. Does that help?
Wait if this is the case and debit indicates the assets in increasing then suppose we happen to say that we have some money in our bank but someone doesn't want to reveal amount and just wants to say as "Debit or Credit balance" then which would be the correct one? *I have debit balance in my bank account or I have credit balance in my bank account* ???
Hello Niraj. Bank statements are written from the bank's perspective. If you have money in your bank account, then that is an asset for you, and on the bank's side a liability from the bank to you. Hence the bank statement will say you have a credit balance.
@@TheFinanceStoryteller Okay thank you! I understood But i want to know that if i want to tell someone that i have money in my account that should i say? "I have credit balance in my bank account or I have debit balance in my bank account" ??
Keep it simple: you either have money in your account, or you owe money to the bank. Per your bank statement, you have a credit balance.
@@TheFinanceStoryteller Okay but can't i say that i have credit balance to light up my saying that i have money in my bank account?
Why does it feel so counter intuitive to call an asset a debit? I felt the same way when I learned that equity was listed as a liability but then it all made sense thanks to your videos.
Hello Hannah! That is a completely natural reaction. Most people come across debit and credit when they review their bank or credit card statement. The statements that banks and credit card companies supply you are written from their perspective: if it's a credit balance in the account, then the bank owes you money (the bank has a liability to you), while if it's a debit balance, then the bank has money to receive from you.
Happy to hear you are enjoying the videos. The official way to look at things in accounting is to say that assets go on the left of the balance sheet (what we own as a company) and liabilities go on the right of the balance sheet (what we owe). Hope that helps!
@@TheFinanceStoryteller Omg, this comment has just made everything suddenly make sense to me haha. Thank you.
Hello there, may I ask why does income increase credit side?
I’m still not sure😕
Please note that I am using the "Western" system of having debits on the left, credits on the right, assets on the left, liabilities and equity on the right. I think what I have seen happen in India is for liabilities to be stated on the left, and assets on the right.
If you want to get an idea of how the income statement and balance sheet relate (through retained earnings), then take a look at this related video: ruclips.net/video/wZdaVEX41WQ/видео.html
Thank you for the video ! Though, I've created an excel that can track all your finances, from income, expenses, to account transfers and exchanges, BUT i don't understand why accountability has to be soooo complicated, my God ! I start to think it's so only so that people don't understand how to manage money. In addition to that, credit = a given loan, debit = a borrowed loan. Why a normal banking account has to be named "debit" account? Why is the bank assuming from the start that i am a possible borrower ? Rigged system...
Happy to help! It seems to me that a lot of people get confused because of all the options we have nowadays of storing and transferring money.
Regarding your question about banking: your bank statements are written from the perspective of the bank. If the bank owes you money ("you have money in the bank"), then from their perspective, it is a liability to you, hence a credit balance.
@@TheFinanceStoryteller Thank you for your time and prompt respone!
Are you Teaching US GAAP please reply, I am from India and want to learn US GAAP
Greetings back from the Netherlands! My video on US GAAP vs IFRS should get you started there: ruclips.net/video/7B96MhOGaqE/видео.html What could be useful as well is to read through the Indian GAAP vs US GAAP manuals that accounting firms like KPMG, PWC, etc publish.
What is a "natural state"? An asset's natural state is a debit balance? How is that determined? It seems to me that an asset would natural be a credit... I'm not understanding this at all
You might be confused with how banks reflect balances on statements. Those are written from the bank's perspective. If the bank owes you money, then they have a liability to you, hence a credit balance in their books. If you owe money to the bank, then they have a receivable on you (an asset), hence a debit balance in their books. Does that help?
The only thing this explanation tells me is that you don't understand why *I* don't understand debits and credits. The book (and you) is expecting me to memorize this information - I'd rather understand why it is how it is so I don't HAVE to memorize it.
Did you find it, do you understand it now?
i still dont get it
Sorry to hear that. Have a look at a few of the related videos in the Accounting 101 playlist, maybe these will help: ruclips.net/video/b93KBmcXanI/видео.html&pp=gAQBiAQB
Any of my DC ADE LER gang here?
That's a good acronym to remember the structure! I think you will enjoy my video on the relationship between income statement and balance sheet, that makes this come alive: ruclips.net/video/wZdaVEX41WQ/видео.html
Just made a video specifically covering DC ADE LER: ruclips.net/video/b93KBmcXanI/видео.html
I’m so dumb I can’t get it
Let's try the related video with the ADE LER method: ruclips.net/video/b93KBmcXanI/видео.html
You can also use the Acronym DEA-LER which may be a little easier to remember. Debits increase Dividends, Expenses, and Assets, and Credits increase Liabilities, Expenses, and Revenue. Vice-Versa.
why the hell the increase of equity is a credit??every source in the internet explain this shit by refering to textbook, which makes it so hard to understand
Hello Jackson. Take a look at my video on the relationship between balance sheet and income statement, that should clarify it: ruclips.net/video/wZdaVEX41WQ/видео.html Basically, the reason equity is on the credit side is that this amount is owed to shareholders. Just like with a borrowing from the bank, in which case the money is in liabilities, which is also on the credit side of the balance sheet.
Definitely not for beginners.
Thank you for the feedback. Sorry to hear that. Maybe the concept makes more sense if you watch the related videos on the accounting equation ruclips.net/video/OYql7Y9NnBg/видео.html and the relationship between income statement and balance sheet ruclips.net/video/wZdaVEX41WQ/видео.html
still dont understand shit
Sorry to hear that. Try the follow-up video using DC ADE LER: ruclips.net/video/b93KBmcXanI/видео.html or study the accounting equation first: ruclips.net/video/OYql7Y9NnBg/видео.html
I’m still lost🥲
Don't worry. Everyone learns in a different way. Maybe the related videos on the accounting equation ruclips.net/video/OYql7Y9NnBg/видео.html or my walk-through of accounting for the transactions in starting a business ruclips.net/video/wZdaVEX41WQ/видео.html will help! Let me know.
I'm still lost too!!! I know it's probably far more simple then we think too. Ugh.