| Long ago, after proudly surviving my first formal | | | | QuickBooks may allow you to merrily enter |
| accounting classes, I was confronted by a CPA | | | | transactions incorrectly. |
| friend of mine (Tom K.) with a mind numbing quiz. | | | | That's where the double entry bookkeeping |
| If you're so smart Mr. Tim, then tell me, what is a | | | | system can help - it provides a system of checks |
| debit and what is a credit? | | | | and balances. |
| I proceeded to launch into a picture perfect and | | | | By adding up all of the debits and adding up all of |
| lengthy explanation of debits and credits. When I | | | | the credits and comparing the two, differences |
| finally finished my erudite spontaneous | | | | stick out like a sore thumb out and you have the |
| pontification on "debits and credits", Tom loudly | | | | chance to correct any errors. When debits and |
| chided me, saying "FLUNK - debits on the left, | | | | credits don't match - the "double entry |
| credits on the right". | | | | bookkeeping" system loudly tells you something is |
| Remember that one - I sure did. | | | | wrong and needs correction. In fact, QuickBooks |
| DEBITS ON THE LEFT - CREDITS ON THE | | | | will actively prevent you from entering "out of |
| RIGHT | | | | balance" (meaning the debits and credits don't |
| That's it - very simple actually; debits on the left, | | | | match) transactions. However, QuickBooks will |
| credits on the right. | | | | NOT always stop you from incorrectly assigning |
| In today's double entry bookkeeping system, | | | | debits and credits to your accounts. |
| instead of using one column for each account and | | | | To avoid confusion over debits and credits, don't |
| entering one number as positive and the other as | | | | think of them in the way they are used in |
| negative, we use two columns for each account | | | | everyday language. |
| with only positive numbers. Whether the entry | | | | You may be confused because you thought a |
| increases or decreases the account is determined | | | | credit was a good thing! We learned these terms |
| by choice of the column in which it is entered. | | | | from dealing with banks and stores, but they |
| Entries in the left column are referred to as | | | | were using the terms from their perspective. |
| debits, and entries in the right column are referred | | | | When the bank gave you a "credit", it was their |
| to as credits. | | | | Cash they are crediting, or subtracting from. |
| In double entry bookkeeping, at least two | | | | Good for you, not good for the bank. |
| accounts are impacted by each transaction, one | | | | As a business owner, think of debits and credits |
| of those entries must be a debit and the other | | | | from your company's point of view. When you |
| entry must be a credit of equal amount. To | | | | debit your Cash, you add to it. When you credit |
| complicate things further, more than two | | | | your Cash, you subtract from it. |
| accounts can be used if the transaction is split | | | | When you put cash in the bank, the bank now is |
| among them, as long as the sum of debits for | | | | obliged to pay it back to you, which is a liability |
| the transaction equals the sum of credits. Oddly | | | | and therefore a credit (increase) of their liability to |
| enough, they must balance (cancel each other | | | | you. So the teller tells you your account has been |
| out, if you think about it) to zero. | | | | "credited". |
| That's one of the beauties of QuickBooks - the | | | | See how this can get confusing now? See how |
| user is spared the decision making process of | | | | the two of you, your company and the bank |
| "what do I enter here.....debit or credit?". | | | | mirror image each other? The "credit" from the |
| The truth is, whether a debit or a credit increases | | | | viewpoint of the bank is, in fact a debit from your |
| or decreases an account balance depends on the | | | | business point of view. Fascinating (as Spock |
| type of account. Asset and expense accounts are | | | | would say), if you think about it. |
| increased on the debit side - liability, equity, and | | | | The confusion can be eliminated by remembering |
| revenue accounts are increased on the credit side. | | | | the basic concept. Debit refers to the left ; credit |
| QuickBooks obscures the credit/debit aspect of | | | | refers to the right. |
| transactions, which is not always a good thing. | | | | And no, it does not mean Democrats are debits |
| That QuickBooks strength can also be a curse. If | | | | and Republicans are credits. |
| you don't "grok" the concept of debits and credits | | | | What do you think? Has this helped shed light on |
| as they apply to specific types of accounts, | | | | the subject? |