I had a discussion with few people in the accounting profession, and it was about Journal Entries. When they started to talk about how the Journal Entry should look like, they seemed kind confused about Debit and Credit. Some people in the accounting profession try to ignore the fact that knowing Debit and Credit is very crucial. Some accounting professors try not to mention them in classes. How can you create a correct Journal Entry without knowing what to debit or what to credit? How can the books be correct if the debit and credit was not correct? How can the accountant reconcile any account without knowing the rules?
It also can be very confusing sometimes if the person does not know the rules. Memorization does not help to do it right. Understanding is an important element to not forget the rule.
Here is the break down of how Journal Entries should be done.
Increasing by Debiting:
Expenses increase by debiting the account
Assets increase by debiting the account.
Increasing by Crediting:
Liabilities increase by crediting the account.
Revenues increase by crediting the account.
Here is a bill booked on credit
DR Light Bill
CR Accounts Payable
When it is paid, the entry should be as follows.
DR. Accounts Payable
CR Cash
We can see that we debited expense and credited payable to book the light bill. That means Expenses and payable went up.
When the bill was paid, Cash was credited to decrease, and Payable debited to decrease also.
If we looked at revenue, the transactions will be booked as follows:
DR Accounts Receivable
CR Revenue
Note: this is not a cash customer, so the transaction is made on credit.
When it is paid:
DR Cash
CR Accounts Receivable
Once the rules are applied on every transaction, it will be really easy to remember and to be done.
Also, it is important to remember that Assets and Liabilities are balance sheet’s items, and Revenues and Expenses are Income Statement Items. The income statement is also called profit and loss statement.
In Conclusion, ignoring the rules does not make it better. Ignoring the facts does not change the fact. Understanding the rules and knowing the facts are the best ways to get things right. If you think it is hard to understand do not ignore it, read about it, learn more about it, and try to understand it. People make jokes about debit and credit, but they are still the center of accounting.
