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Pay Attention to the Signs -- Debits and Credits for Dummies
Total Reading Time: 6 minutes
Debits and Credits -- Those words cast fear into even the above average small business person who's not had sufficient intro accounting classes. It is in fact the concept of debits and credits that has prevented everyone from building their own accounting software in spreadsheets. For the level needed for basic accounting, this not overly complicated stuff, and even if you use our positive and negative values version of software, you need some basic understanding.
I remember debits and credits for Liability and Assets accounts this way...
Asset Accounts with a checking account as my model
** -- I do NOT memorize this entire chart. I memorize one line and then fill in the rest...
Debits and Credits -- Those words cast fear into even the above average small business person who's not had sufficient intro accounting classes. It is in fact the concept of debits and credits that has prevented everyone from building their own accounting software in spreadsheets. For the level needed for basic accounting, this not overly complicated stuff, and even if you use our positive and negative values version of software, you need some basic understanding.
I remember debits and credits for Liability and Assets accounts this way...
Asset Accounts with a checking account as my model
- A checking account is an "Asset" account
- A transaction which causes the balance to increase on a checking account is a "debit"
- A transaction which causes the balance to decrease is a "credit" (the opposite)
- A credit card account is a "Liability" account
- A transaction which causes the balance to increase on a credit card account is a "credit" **
- A transaction which causes the balance to decrease is a "debit"
** -- I do NOT memorize this entire chart. I memorize one line and then fill in the rest...
- I remember "A transaction which causes the balance to increase on a credit card account is a 'credit'" -- As long as I remember that, I can fill in the rest of this list by using opposing logic. The other transaction on a credit card is a debit, and Asset accounts are the opposite of liability accounts.
Here is a chart that says the same thing...
This chart to the right says the same thing as the paragraphs above...
Positive and Negative values vs Debits and Credits -Part 1
Income Statement Reporting challenges if you don't flip some signs
We have developed both a debits and credits version of our software as well as a negative and positive values version. Why didn't everyone build their on positive and negative values version years ago?
The answer is simple...
Humm. that didn't work... It seems I have to flip the sign on the debit card purchase to get totals for reporting.. AND THAT is the problem with trying to do real accounting in a spreadsheet. And THAT is the only major problem, believe it or not. But it is significant enough to keep folks from using spreadsheets to do what they do best. Until now anyway...
The answer is simple...
- A credit card transaction for an expense is recorded in a ledger as positive value because it increases your credit card balance
- BUT a check or debit card transaction or for the same expense is recorded as a negative value because it decreases your checking account balance...
- Hummm...
- What if I wanted to run a report on total supplies purchased via both my credit card account and my checking account?
- A $100 credit card purchase would be added to a negative $100 debit card purchase and i would get ZERO instead of $200 [ $100 + (-$100) = 0 ]
Humm. that didn't work... It seems I have to flip the sign on the debit card purchase to get totals for reporting.. AND THAT is the problem with trying to do real accounting in a spreadsheet. And THAT is the only major problem, believe it or not. But it is significant enough to keep folks from using spreadsheets to do what they do best. Until now anyway...
Positive and Negative values vs Debits and Credits -Part 2
The contradictory signs in a table for comparison
Checking Account
Expense - Debit card purchase | - | Expense - ATM withdrawal | - | Expense Expense - Check | - | Expense Expense - Withdrawl | - | Expense-ish Negative Expense - Return Item | + | Income - Deposit | + | Negative Income - Bounced Check (written to you) | - | |
Credit Card Account
Expense - Credit card purchase | + | Expense - Cash Advance | + | Negative Expense - Return Item | - | {Income} - Deposit | - | |
Why is it this way?
A checking account is an "Asset" Account. A positive balance in that account is positive. A credit card account is a "Liability Account". A positive balance in that account is a negative from the perspective that we have to pay it off, but we generally track it as a positive balance and that's where the contradiction in signs comes in.
It is the handling of this sign flipping that has prevented most from using spreadsheets efficiently for Income Statement reporting. It's not a huge hurdle to overcome, and we've done it for you so don't worry, but it was enough of a hurdle to force millions to seek out Quicken, Quickbooks, Freshbooks and numerous other fee-based solutions when in fact the free solution has been just a sign flip away for many years.
A checking account is an "Asset" Account. A positive balance in that account is positive. A credit card account is a "Liability Account". A positive balance in that account is a negative from the perspective that we have to pay it off, but we generally track it as a positive balance and that's where the contradiction in signs comes in.
It is the handling of this sign flipping that has prevented most from using spreadsheets efficiently for Income Statement reporting. It's not a huge hurdle to overcome, and we've done it for you so don't worry, but it was enough of a hurdle to force millions to seek out Quicken, Quickbooks, Freshbooks and numerous other fee-based solutions when in fact the free solution has been just a sign flip away for many years.
The use of "Debits and Credits" allows for the simple addition of positive signed amounts...
With this understanding of the problems of using signed ledgers and with a basic understanding of debits and credits, you might now be able to see a benefit of debits and credits.
A transaction that increases a credit card balance is a credit
If I want to know my total office expenses, I can then just sum credits related to these on my Asset and Liability accounts -- but in fact, I'll be summing "debits" against the office expense account.
A transaction that increases a credit card balance is a credit
- A purchase of a $100 office expense item with a credit card is then a "credit"
- A purchase of a $100 office expense item with a check is then a "credit"
If I want to know my total office expenses, I can then just sum credits related to these on my Asset and Liability accounts -- but in fact, I'll be summing "debits" against the office expense account.