Intro > Pay Attention to the Signs -- Debits and Credits for Dummies
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.
If you are going to manually enter your transactions as opposed to using data you've downloaded, you will need to remember to put negative signs in front of debit transactions and check transactions (and others similar), and ou will need to put proper signs on returns on debit and credit cards in order to get proper reporting. It's not a huge deal, but none of your reporting will work out if you don't get this right.
I'm going to give a simple example below which should help even the most uninformed person realize some of the issues related to positive and negative signs that have to be addressed to deliver a simple accounting solution. If you are downloading transactions, they will most likely have all the signs properly assigned.
If you are going to manually enter your transactions as opposed to using data you've downloaded, you will need to remember to put negative signs in front of debit transactions and check transactions (and others similar), and ou will need to put proper signs on returns on debit and credit cards in order to get proper reporting. It's not a huge deal, but none of your reporting will work out if you don't get this right.
I'm going to give a simple example below which should help even the most uninformed person realize some of the issues related to positive and negative signs that have to be addressed to deliver a simple accounting solution. If you are downloading transactions, they will most likely have all the signs properly assigned.
A simple example...
A credit card transaction for an expense is recorded in a ledger as positive value because it increases your credit card balance, BUT a debit card transaction for the same expense is a negative value because it decreases your checking account balance...
Now... what if I wanted to run a report on total supplies purchased? Simple, I'd add up my ledger entries and get total, right?
Now... what if I wanted to run a report on total supplies purchased? Simple, I'd add up my ledger entries and get total, right?
- 100 credit card purchase + (-100) debit card purchase = 0...
Opposites don't attract, they cause problems...
Checking Account
Debit card purchase | - | Expense ATM withdrawal | - | Expense Check | - | Expense Withdrawl | - | Expense-ish Return Item | + | Negative Expense Deposit | + | Income Bounced Check (written to you) | - | Negative Income |
Credit Card Account
Credit card purchase | + | Expense Cash Advance | + | Expense Return Item | - | Negative Expense Deposit | - | Ledger entry... |
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.