What is Debit and Credit in Accounting (comes with cheat sheet for you!) - YouTube

When you heard the word "Debit" and "Credit",

you will automatically think of Accounting.

They mean more than just being the mascots of Accounting.

Let's look at the real meaning behind them today.

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Debit and Credit is the movements in monetary value either increase or decrease.

It plays a vital role in Double Entry principle.

In my previous video on double entry,

You have seen Debit and Credit in action with practical example.

If you would like to check out that video, I will put the link in the description for you.

In the "T" Accounts format, the left side is Debit while the right side is Credit.

This is their basic positioning in the traditional book for accounting.

But now that we are using accounting systems,

this has now become a good to know knowledge only.

To give you a better understanding of how Debit and Credit works in mathematical way,

let's follow the money in your wallet.

In the morning, you have $100 in your wallet.

You went to your local diners and spent $10 on breakfast.

On your way out, you bumped into your friend Lily,

who returns $20 to you, which she borrowed from you yesterday.

The money that you have in your wallet right now, in a basic mathematical calculation, is

$100 - $10 + $20 = $110.

So you have $110 in your wallet right now.

I would like to think Debit is Positive and Credit is Negative.

For me, I feel that mathematical way to calculate things is the easiest to understand.

Plus, your calculator can help you on that.

When I think of it that way, Debit is positive and credit is negative,

I can always calculate my entries with the use of a calculator before recording it into my accounts.

In accounting term, when your wallet receives money, it will be a debit to your cash account

and when you spend money, which is a negative value, it will be a credit to your cash account.

and your balance is a debit balance.

Because its a positive balance so its a debit balance.

Now let's look at accounting equation.

If you need help in accounting equation, check out my other video which I will put the link in the description for you.

All the things that you own is a Debit Balance while all the things that you owe is a Credit Balance.

When the transaction is in line with the balance side, it will increase the balance of the account.

In a debit balance account, all the things that you own, which is your assets

all debit transactions will increase the value of what you own

while credit transactions will decrease it.

A credit balance account which is your liabilities and your equity accounts

is the opposite where credit transactions will increase the amount that you owe.

And with a debit transaction it will decrease the amount that you owe.

To help you to understand debit and credit better,

I have prepared a cheat sheet for you.

In this cheat sheet, I have listed out the account balance

whether it is a Debit account balance or a credit account balance.

And what is the impact of Debit and Credit to the accounts

whether it is increasing the account or decreasing the account.

You may print it out or put it somewhere that's easily accessible for you

whenever you record your accounting entries

Just keep in mind that I have highlighted those balances that will increase the value of the account.

Debit and Credit is so easy, right?

Comment "Nutsy Easy" below.

To keep things interesting for you, let's walkthrough Rachel's start up story.

Before we start, I would like to highlight that your business transactions is a separate entity from you.

These examples will be looking at the point of view from your business.

Rachel started an online store that sell clothes online.

She opens a bank account for her business,

and deposited $1000 from her own money.

The business now owns $1000, which is an increment in asset.

And at the same time, the business owes Rachel $1000

which is an increase in equity.

Next, she setup her online store and its now up and running.

She paid $500 for this.

A debit of $500 to her expenses which is categorized as Equity

will decrease the Equity by $500.

And meanwhile, her bank account also decreases by $500 with a credit transaction.

She made a purchase with a 30 days credit term from a clothing supplier of $200.

As her business now owes the supplier $200,

her liability increase by $200.

and her inventory which is an asset account

will increase as well.

A week later, she made her first sales online.

She sold at $40.

Her bank account, which is an Asset account, increases by $40

while her Equity, which is her Sales account, increases by $40 as well.

Her cost for that piece is $20.

In this transaction, her cost of goods sold account is debited with $20,

which is a decrease in her equity of $20.

And meanwhile, the inventory account is credited with $20,

which is an asset and it is decreasing as well.

Now its time for Rachel to review the accounts.

Her total assets is $720

and her total liabilities + equity is $720 as well.

The accounting equation remains balance after all the transactions recorded.

To help you to understand Debit and Credit better, I have prepared some nutty practice for you.

Write your answers in the comments below.

A debit transaction to Bank Account will increase or decrease the account balance?

A business owner's capital account is a debit or credit balance account?

A loan from bank is a debit or credit balance account?

Your knowledge in debit and credit is very important.

I assure you it will be used every time when you do accounting.

Spend some time to fully understand it before you proceed to the next video of this series.

Today's nutty question is:

What is the impact of a Debit transaction to a Liability account?

Does it increase or decrease the balance?

Now, I would love to hear from you.

If you have any accounting questions or accounting topics that you would like to learn,

let me know in the comments below.

Join in the conversation with fellow entrepreneurs in the comments section below.

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