Accounting forum
The concept of debits & credits |
estralla
20-08-2007 01:24
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I just started my first module in financial and I can't get into the bottom of this debit credit rules and why this critical to business. Is anyone can help and explain further.
Thanks
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Re: The concept of debits & credits |
danica
20-08-2007 01:24
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Are you studying for the CPA exam and that is what you mean by your first module in financial (Becker)? Debits and Credits are the basis of accounting. Debits=Credits Always. 
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Re: The concept of debits & credits |
lanod
20-08-2007 01:28
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Studying for the exam but having difficulty comprehending conceept of dr and cr? what am i missing cpagirl
In acctg, for every transaction there is either a debit or credit. I'm able to teach my eight yr old this.
debits are parts of a transaction that increase an asset and decrease a liability or equity. Credits, just the oppposite, they increase a liab and eq and decease a debit or asset.
thats all you need to know if non acct.
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Re: The concept of debits & credits |
tallan
20-08-2007 01:28
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Money must come from somewhere- it doesn't just "appear"- Money doesn't grow on trees.
Imagine if there is no double entry accounting,
If you have $100 with you and later buy pens for $20 today
Remaining cash = $80
On next day, you might forget what you spend $20 for.
So with double entry accounting, you can track just where your money comes from and where it goes.
Date: Today
DR Stationery $20
Cr Cash $20
If you record it in books and might forget what you exactly spend $20 for, you can look at your books and find out that you have spend $20 on stationery.
But of course you can use single-entry accounting or cashbook to keep track of cash movement.
Even if you use single-entry accounting, you will still see
Stationery $20
Cash $20
So for every debit, there is always a credit.
However, single entry accounting is more on cash basis. Double entry accounting is more on accrual and cash basis- which is in accordance with matching concept and revenue recognition principle.
With single entry accounting, there is a higher chance of fraud.
Expense column
Stationery $20
Stationery $20
Cash column
Cash $20
You won't be able to easily trace errors but more time-consuming for tracing.
with double-entry accounting, it will minimize error
DR stationery $20
CR Cash $20
If you key in another stationery $20
DR stationery $20
And you have to key in credit item.
Anyway, when you receive several invoices but not yet pay, even with cashbook, you won't be able to know how much in total you owe others.
And when you did work for other people and have not received $$ from them, even with cashbook, you won't be able to know how much in total others owe you.
So you need double entry for every transaction to know how much in total you owe others and to know how much others owe you.
In short double entry accounting is more on accrual & cash basis.
And you will be able to track the stream of money in your business if you have a lot of money.
In business, it is not only for yourself, but others who want to know your finances and you need to have the information available in a format they understand-Assets, Revenue, Expenses, Liabilities, Profit/Loss
yes i think double entry accounting is a lot more work and you have to remember accounting princicples and definition. More logical work.
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Re: The concept of debits & credits |
ciara
20-08-2007 01:32
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Thank you all for the information, it contributed a lot to my knowledge. I'm just a beginner and my questions is part of my assignments in my study. Here in our country, we used courses or modules (e.g accounting to trial balance) instead of subject and program(CPA) instead of a course. Its a little bit confusing but later new student from other country get used to the terminolgy.
Another thing I want to know is why still essential to accountants to have
understanding of debits and credits application if they can just use accounting packages software that can give them answers. Many of businesses of today operates accounting software packages without understanding of debits and credits and still succed with their business. Well, maybe i'm wrong or else cpa is out of the picture if these accounting software better than them.
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Re: The concept of debits & credits |
mike
20-08-2007 01:35
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hi, the concept of dr and cr is an important part of any types ofd acc**t, the priciple of cr andb cr is a principle that underlay that every transaction you made will always have a side for u when you are receiving what u paid for and the other when when you are paying..
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Re: The concept of debits & credits |
jedi
20-08-2007 01:37
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The programs only go so far also. In my Accounting Information class we used Peachtree. While a standard sale and purchase workd fine, anything that was even slightly different required us to understand accounting to make sure it was posted correctly.
Anyone who has audited a small firm can tell you, the Accting Programs only work so far and they end up spending a lot of time trying to fix what a non-accountant miss applied. A problem that could have dire tax consequences later
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Re: The concept of debits & credits |
emerson
20-08-2007 01:39
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Accounting involves the recording of all transactions of a business that involve money or money's worth. A transaction in accounting involves the transfer of a value from one account to another. For the accountant every business transaction affects two accounts. An account is a record containing details of transactions for a specific item.
Every transaction in accounts affects two accounts, namely the giver of the value and the receiver of such value. This assumption is necessary because it enables the accountant, at any moment, to determine who owes value and who is owed. It is this receiver and giver entities that led the creation of the principle of debt and credit and as such the golden rule of bookkeeping, that is debit the receiver and credit the giver.
Why do we study accounting if accounting software can do the entire job?
1. The software is developed by accountants who studied accounting.
2. Computers do not make decisions they choose between alternatives. Accountants make decisions.
3. The software cannot solve all the problems. It is limited in content.
4. Human beings are innovative and are capable of finding solution to new problems.
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Re: The concept of debits & credits |
vap
09-06-2008 03:42
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there are three simple rules in accounting to understand debit credit
1.personal account - debit what comes in. credit was goes out
2. Real Account - debit the receiver, credit the giver
3. Nominal Account - debit all expenses and losses, and credit all income and gains
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Re: The concept of debits & credits |
Hashim
14-02-2010 11:43
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The terms debit & credit refer to left and right sides of the general ledger account and both are commonly abbreviated as Dr. for debit and Cr. for credit. Note that debit & credit do not mean increase or decrease. The act of entering an amount on the left side of the account is called debiting the account, while posting an amount on the left side of the account is known as crediting the account.
Source: http://www.accountingscholar.com/double-entry-accounting.html
An account is a detailed record of increases or decreases in a specific asset, liability or owner’s equity. All accounts on the trial balance are then used to produce financial statements at the end of the month or the quarter. Separate accounts are kept for each type of asset, liability or equity. The basic accounting equation is:
Assets = Liabilities + Owner’s Equity
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