Credits and Debits Flashcards
Are debits and credits good or bad?
Debits and credits are neither good nor bad.
Are debits and credits the same as adding and subtracting?
No. Debits and credits are not the same as adding and subtracting.
What are Debits and Credits?
Words used to reflect the duality or double sided nature of all financial transactions.
What must money do to go into one account?
Money must come out from another account to go into another one.
What do accountants consider every transaction to involve?
A flow of Economic Benefit from a source to a destination.
What is Economic Benefit?
Economic Benefit is the potential for an asset to contribute either directly or indirectly to the flow of an entities cash.
What are Debits?
Destinations that economic benefit can flow to.
What are some examples debit accounts that economic benefit flows to?
Assets: Cash, Buildings, A/R
Expenses: Paying third parties for goods or services.
Dividends: Where a business distributes cash to some of its owners.
What are some examples of Credit accounts where economic benefit can flow from?
Owners Equity: Where business owners give their cash to the business.
Liabilities: Such as amount owed to the bank and exchange for a loan or supplies for providing a good or service.
Revenue: Revenue
Do credits or debits represent assets?
Debits
Do Debits or Credits represent Liabilities?
Credits
How do you understand and calculate Equity properly?
You have to expand it into the components that make it up.
Equity = Owners Equity (paid in) - Dividends (paid out) + Retained Earnings (profit held for future use)
How do you calculate Retained Earnings?
Retained Earnings = Revenue - Expenses
If the equations for equity and assets are rearranged, what do they create?
DEALER
How are Assets calculated?
Assets = Liabilities + Owners Equity (paid in) - Dividends + Revenue - Expenses.
What does the acronym DEALER represent?
Dividends + Expenses + Assets = Liabilities + Owners Equity + Revenue
In the acronym DEALER, what do Dividends, Expenses and Assets represent?
These represent the Debits which are on the left hand side of the DEALER. DEA
THESE ACCOUNTS INCREASE WHEN DEBITED AND DECREASE WHEN CREDITED.
In the acronym DEALER, what do Liabilities, Owners Equity, and Revenue represent?
These represent credits. They are the right hand side of the acronym DEALER. LER.
THESE INCREASE WHEN CREDITED AND DECREASE WHEN DEBITED.
RECAP
Debits and credits reflect the ______ of ALL Financial Transactions.
Duality
RECAP
Debits represent the flow of economic benefit __ a ___________.
To a Destination
RECAP
Credits represent the flow of economic benefit ____ a ______.
From a Source
RECAP
What can the Accounting Equation be rearranged to be to create the acronym
DEALER?
Dividends Liabilities
+ Expenses = + Owners Equity
+ Assets + Revenue
Are Debits and Credits backwards in banking?
No, Debits and Credits are not backwards in banking!
It is commonly asked why debits and credits are backwards in banking.
- Remembering that cash is an asset and it is a normal debit balance**
How do Debits and Credits affect asset accounts in Financial Accounting?
In Financial Accounting:
Debits increase Assets and Credits decrease Assets.
- Remembering that cash is an asset and it is a normal debit balance**
How do Debits and Credits affect asset accounts in Banking?
In Banking:
Credits increase assets and Debits decrease assets.
Why does it appear to have a direct contradiction in debits and credits when it comes to banking?
From the bank’s point of view, our checking account is a liability not an asset.
If we go to the bank and deposit money into our checking account, the bank debits their cash to increase it, and then credits the amount owed to us because it owes that money back.
Debits and credits are not backwards in banking. It is all about perspective.
