Traditionally, the posting of debit and credit transactions has been called Bookkeeping
“debits always go on the left and credits always go on the right” brings no joy. I explain debits and credits in a new way - using basic math concepts!
remember the math number line from school? Zero is in the middle. The numbers to the right of zero are positive and they get bigger as they go to the right. The numbers to the left of zero are negative and they get bigger as they go to the left. If you add a positive number to any number on the number line, you move to the RIGHT on the number line to get your answer. Likewise, if you add a negative number (subtract) to any number on the number line, you always move to the LEFT on the number line to get your answer.
The Five types of Accounts in an Accounting System:
To fully understand how to record bookkeeping transactions, we must understand that all of our accounts fit into one of 5 categories. The account categories are:
- Assets: what the company owns of value (Cash, Accounts Receivable, furniture, vehicles)
- Liabilities: what the company owes to others (loans, Accounts Payable)
- Equity: the company’s net worth. Equity equals Assets minus Liabilities
- Revenue: money the company is earning
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Expenses: money the company is spending
Assets and Expenses
Because Asset and Expense accounts maintain positive balances, they are positive, or debit accounts. Accounting books will say “Accounts that normally have a positive balance are increased with a Debit and decreased with a Credit.” Of course they are! Look at the number line. If you add a positive number (debit) to a positive number, you get a bigger positive number. But if you start with a positive number and add a negative number (credit), you get a smaller positive number (you move left on the number line). The asset account called Cash, or the checking account, is unique in that it routinely receives debits and credits, but its goal is to maintain a positive balance!
Liabilities, Equity, and Revenue
Liability, Equity, and Revenue accounts usually receive credits, so they maintain negative balances. They are called credit accounts. Accounting books will say “Accounts that normally maintain a negative balance are increased with a Credit and decreased with a Debit.” Again, look at the number line. If you add a negative number (credit) to a negative number, you get a larger negative number! (moving left on the number line). But if you start with a negative number and add a positive number to it (debit), you get a smaller negative number because you move to the right on the number line.
[Remember: A debit adds a positive number and a credit adds a negative number. But you NEVER put a minus sign on a numbers you enter into the accounting software.]
Debit and Credit Accounts Logic
There is logic behind which accounts maintain a negative balance. It makes sense that Liability accounts maintain negative balances because they track debt, but what about Equity and Revenue? Well, though we are happy if our Revenue and Equity accounts have healthy balances, from the company’s viewpoint, the money in these accounts is money that the company owes to its owners.
What about debit accounts? It’s easy to understand why an Asset account is positive since it tracks the company’s Cash and other valuable possessions, but what about Expenses? Well, the services and supplies required to run the business do cause a decrease in Owner’s Equity, so they could be viewed positively from the company’s standpoint.
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