Debits and Credits

Summary

This video script explains the fundamental accounting concepts of debits and credits. It suggests thinking of debits as 'left' and credits as 'right' to understand how they affect the balance sheet equation: assets = liabilities + stockholders' equity. Assets increase with debits, while liabilities and stockholders' equity increase with credits. Revenues, which increase stockholders' equity, are also recorded as credits. Expenses and dividends, which decrease stockholders' equity, are recorded as debits. The script emphasizes applying this logic to understand how transactions are recorded in journal entries.

Takeaways

• 📚 Debits and credits are fundamental to accounting and should be thought of as left and right, respectively.
• 🔍 The basic accounting equation is Assets = Liabilities + Stockholders' Equity, and it must always balance.
• 📈 Assets increase with a debit, as they are on the left side of the equation.
• 📉 Liabilities and Stockholders' Equity increase with a credit, as they are on the right side of the equation.
• 💹 Revenues increase Stockholders' Equity, so they are recorded as credits.
• 🛒 Expenses decrease Stockholders' Equity, so they are recorded as debits.
• 💸 Dividends reduce Stockholders' Equity, and thus are also recorded as debits.
• 🔄 The opposite logic applies to decreases in assets, liabilities, and Equity accounts.
• 📝 Debits and credits are recorded in journal entries to track economic transactions.
• 📑 These entries are then posted to a ledger, which helps in maintaining the financial records of a business.

Q & A

What is the fundamental concept discussed in the video?

The video discusses the fundamental concept of debits and credits in accounting.

How should the terms 'debit' and 'credit' be thought of in the context of the video?

In the video, 'debit' should be thought of as synonymous with 'left' and 'credit' as 'right'.

What is the basic accounting equation mentioned in the video?

The basic accounting equation mentioned is Assets = Liabilities + Stockholders' Equity.

How do assets increase according to the video?

Assets increase with a debit, as they are on the left side of the accounting equation.

What happens to liabilities and stockholders' equity when they increase?

Liabilities and stockholders' equity increase with a credit, as they are on the right side of the accounting equation.

How does the concept of debit and credit apply to revenue?

Revenue increases stockholders' equity, which is on the right side, so it increases with a credit.

What is the impact of expenses on stockholders' equity and how are they recorded?

Expenses decrease stockholders' equity, so they are recorded with a debit, as they do the opposite of increasing equity.

What is the effect of issuing dividends on stockholders' equity and how are they recorded?

Issuing dividends decreases stockholders' equity, so they are recorded with a debit, reflecting the reduction in equity.

How does the video explain the recording of decreases in asset accounts?

A decrease in an asset account is recorded with a credit, as it is the opposite of increasing an asset with a debit.

Similarly, how are decreases in liability accounts recorded?

Decreases in liability accounts are recorded with a debit, as it is the opposite of increasing a liability with a credit.

Where do debits and credits take place as discussed in the video?

Debits and credits take place in journal entries, which are then posted to a ledger to record economic transactions.

Outlines

00:00

🧮 Understanding Debits and Credits

The video begins by introducing the fundamental concepts of debits and credits in accounting. The speaker asks viewers to set aside any preconceived notions and instead associate debits with the word 'left' and credits with 'right'. The basic accounting equation, Assets = Liabilities + Stockholders' Equity, is used to explain how assets increase with a debit (left side) and liabilities and stockholders' equity increase with a credit (right side). The video also touches on how revenue increases stockholders' equity with a credit and expenses decrease it with a debit. The concept of dividends, which decrease stockholders' equity, is briefly mentioned as being recorded with a debit.

05:01

📉 Decreasing Accounts and Journal Entries

This paragraph delves into how to account for decreases in various types of accounts. It explains that if an asset decreases, it is recorded with a credit, the opposite of its increase which is recorded with a debit. The same logic applies to liabilities; an increase is recorded with a credit, while a decrease is recorded with a debit. The paragraph also clarifies that these debits and credits are recorded in journal entries, which are then posted to a ledger. The speaker emphasizes the importance of understanding the concepts of debits and credits before moving on to more complex accounting processes.

Keywords

💡Debits

Debits are entries on the left side of an accounting ledger. In the video, debits are likened to the word 'left' to simplify understanding. They are used to record increases in asset accounts, such as inventory or cash. For example, when a business purchases inventory, the inventory account is debited to reflect the increase in assets.

💡Credits

Credits are entries on the right side of an accounting ledger and are equated with the word 'right' in the video. They are used to record increases in liability and stockholders' equity accounts. For instance, when a company issues bonds, the bonds payable account is credited to reflect the increase in liabilities.

💡Accounting Equation

The accounting equation mentioned in the video is Assets = Liabilities + Stockholders' Equity. It represents the fundamental balance sheet equation that must always be in equilibrium. The video uses this equation to explain how debits and credits maintain this balance, with assets increasing on the debit side and liabilities and equity increasing on the credit side.

💡Assets

Assets are resources owned by a business that have future economic value. The video explains that assets increase with a debit. For example, when cash is received from a customer, the cash account is debited, indicating an increase in assets.

💡Liabilities

Liabilities are debts or obligations that a business owes to others. According to the video, liabilities increase with a credit. An example given is accounts payable, which increases when a company buys goods on credit, thus incurring a liability.

💡Stockholders' Equity

Stockholders' Equity, also known as owners' equity, represents the residual interest in a company after deducting its liabilities from assets. The video clarifies that increases in stockholders' equity, such as retained earnings from sales, are recorded with a credit.

💡Revenue

Revenue is the income generated from the main operations of a business. The video explains that revenue, which increases stockholders' equity, is recorded as a credit because it affects the right side of the accounting equation.

💡Expenses

Expenses are costs incurred by a business in the normal course of operations. The video indicates that expenses decrease stockholders' equity and are therefore recorded as debits, which is the opposite of credits used for increases.

💡Dividends

Dividends are payments made by a corporation to its shareholders. The video describes that when dividends are issued, they decrease stockholders' equity, and thus are recorded as debits, aligning with the concept of doing the opposite of an increase.

💡Journal Entries

Journal entries are the initial recording of transactions in an accounting system. The video mentions that debits and credits are applied in journal entries to record economic transactions before they are posted to the ledger.

💡Ledger

A ledger is a book or computer system that contains all the accounts a company uses to track its financial activity. The video discusses how journal entries, which include debits and credits, are posted to the ledger for organized record-keeping.

Highlights

The fundamental concept of debits and credits in accounting.

Debit is synonymous with the word 'left' and credit with 'right'.

Assets increase with a debit, aligning with the left side of the accounting equation.

Liabilities and stockholders' Equity increase with a credit, on the right side.

The accounting equation must always balance, reflecting equal left and right sides.

Revenues increase stockholders' Equity and are recorded with a credit.

Expenses decrease stockholders' Equity and are recorded with a debit.

Dividends reduce stockholders' Equity and are recorded with a debit.

Decreasing an asset is recorded with a credit, the opposite of an increase.

Decreasing a liability is recorded with a debit, the opposite of an increase.

Debits and credits are recorded in journal entries for transactions.

Journal entries are posted to a ledger to track economic transactions.

Understanding debits and credits is crucial for correctly recording financial activities.

The video suggests watching another video for more on dividends.

The video emphasizes the importance of the accounting equation balance.

The video provides a clear analogy of debits and credits with left and right.

The video explains the impact of revenues, expenses, and dividends on Equity.

Transcripts

in this video we're going to talk about

something really fundamental uh to

accounting and that's the the idea of

this debits and credits uh notion so you

might be wondering you know what what

does debit mean what does credit mean

does that mean uh increase or or does

that mean a decrease does does debit

mean an increase or credit so so I I

just ask you for a moment just kind of

hold aside any uh preconceived notions

that you might have about what these

words mean and let's just think of them

in these terms here let's think that

debit when we say the word debit that

that's synonymous with the word left and

then when we say

credit let's think of credit as meaning

right so debit means left and credit

means right so let's just let's just

think about that for a minute now you

might be saying well left and right with

respect to what so let's return uh to

the basic accounting equation uh so if

you haven't gone over this I suggest you

look at the other video but we've got

assets are equal to liabilities and

stockholders Equity or owners Equity

however you want to think about it so we

always know that the left side is going

to equal the right side and this

equation must balance so let's think

about this we just said the debit means

left so here we've got the left side of

the equation right so how do we how do

we think about this well since debit is

left we can think about this that assets

when they increase they increase with a

debit okay so when we think of an asset

let's take an asset account like

inventory or cash those are assets and

assets will always increase with a debit

okay now we can think about the right

hand side of this equation and we've got

liabilities and and stockholders Equity

these are both on the right hand side

and remember that we said credit means

right so how do we think about that well

we just figure that when we have an

increase in a liability account or a

stockholders Equity account it's going

to increase with a credit okay so any

liability account uh accounts payable uh

bonds payable uh any stockholders Equity

account like retained earnings those

accounts since they're on the right side

they are going to increase with a credit

okay so just remember that debit means

left and credit means right so that'll

help us when we think about this

accounting equation we understand that

assets will always increase with a debit

and then this right hand side

liabilities and stockholders Equity any

of those accounts will always increase

with a credit so now you might be

wondering okay well what about accounts

uh that that that don't show up here

what about ones that we think that

aren't permanent accounts which is

something we'll get into later but why

don't we think about things like

Revenue what about revenue or sales

however you want to call it when we make

sales at our business well what happens

well essentially we're affecting

stockholders Equity right the equity in

The Firm is increasing when we make

sales so we can think of that also as a

credit because we're increasing

stockholders equity which is on the

right side and that's will increase with

a credit so therefore because revenue is

increasing stockholders Equity it will

increase with a

credit okay now we think of expenses

let's think of

expenses now when we think of an expense

it's something that is decreasing stock

holders Equity okay and we haven't

really talked about now well what if

we're decreasing one of these accounts

all right we've said okay if we're

increasing stockholders Equity then it's

going to increase with the credit well

what do we do when it's decreasing we

simply do the opposite and so we would

debit

it right because normally we say well

what do we increase stockholders Equity

with we increase it with a credit

because it's on the right hand side of

the equation but if we were to do the

exact opposite and decrease stockholders

Equity instead of increase then we're

going to make a debit and so an expense

which is a decrease in stockholders

Equity is going to be a debit now

there's another account that we can

think about which is if you issue a

dividend now this might be something you

might want to watch another video on

dividends but when we think about a

dividend what we're actually doing uh is

is we're paying out we're reducing

stockholders Equity by making a

distribution right so so there's some

equity in the firm and we're paying that

out uh to to shareholders Okay so we've

got the shareholders here and we're

paying out some of the equity so we're

decreasing Equity with a dividend and

what happens if we're decreasing Equity

well we talked about if we increase

Equity we increase it with a credit so

if we decrease equity

we just do the opposite and make a debit

so dividends increase with a debit so

now we can kind of apply when we thought

of okay well what if we reduce Equity

what if it goes down uh then we've we've

got these debits we're actually doing

the opposite of the increase well we can

think about it the same way we can apply

the same logic to assets or liabilities

or Equity accounts in general and so

what I mean by that is this so when we

say said that when you have an asset it

increases with a debit because it's on

the left side and debit means left but

what if we were to decrease an asset

account let's say we had inventory which

is an asset what if we're having a

reduction in our inventory well what do

we do well again we simply do the

opposite right if we know that an

increase in an asset like inventory is

going to be increased with a debit then

a a decrease in an asset would be

recorded with a credit and we can use

the same logic when we think about

liabilities like something like accounts

payable since accounts payable is a

liability right it would increase with

the credit and then how do we decrease

it we simply do the opposite and we

would debit it now you might be

wondering at this point where do all

these things take place debit what

credit what where where do we what what

are we doing where are these things

actually going to take place and we're

going to do debits and credits in

something called journal entries right

so when there's some kind of transaction

that the firm has like it's recording a

sale or something like that we're going

to record these uh in a journal it's

going to be posted to a ledger so we

make these entries to record economic

transactions and then we're going to

post those potentially to te accounts

and we're going to do all these great

things but before we do all that and get

into those videos just understand that

debit means left credit means right

assets increase with the debit

liabilities and Equity accounts increase

with a credit