Credits and Debits

Question 1

Are debits and credits good or bad?

Answer 1

Debits and credits are neither good nor bad.

Question 2

Are debits and credits the same as adding and subtracting?

Answer 2

No. Debits and credits are not the same as adding and subtracting.

Question 3

What are Debits and Credits?

Answer 3

Words used to reflect the duality or double sided nature of all financial transactions.

Question 4

What must money do to go into one account?

Answer 4

Money must come out from another account to go into another one.

Question 5

What do accountants consider every transaction to involve?

Answer 5

A flow of Economic Benefit from a source to a destination.

Question 6

What is Economic Benefit?

Answer 6

Economic Benefit is the potential for an asset to contribute either directly or indirectly to the flow of an entities cash.

Question 7

What are Debits?

Answer 7

Destinations that economic benefit can flow to.

Question 8

What are some examples debit accounts that economic benefit flows to?

Answer 8

Assets: Cash, Buildings, A/R

Expenses: Paying third parties for goods or services.

Dividends: Where a business distributes cash to some of its owners.

Question 9

What are some examples of Credit accounts where economic benefit can flow from?

Answer 9

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

Question 10

Do credits or debits represent assets?

Answer 10

Debits

Question 11

Do Debits or Credits represent Liabilities?

Answer 11

Credits

Question 12

How do you understand and calculate Equity properly?

Answer 12

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)

Question 13

How do you calculate Retained Earnings?

Answer 13

Retained Earnings = Revenue - Expenses

Question 14

If the equations for equity and assets are rearranged, what do they create?

Answer 14

DEALER

Question 15

How are Assets calculated?

Answer 15

Assets = Liabilities + Owners Equity (paid in) - Dividends + Revenue - Expenses.

Question 16

What does the acronym DEALER represent?

Answer 16

Dividends + Expenses + Assets = Liabilities + Owners Equity + Revenue

Question 17

In the acronym DEALER, what do Dividends, Expenses and Assets represent?

Answer 17

These represent the Debits which are on the left hand side of the DEALER. DEA

THESE ACCOUNTS INCREASE WHEN DEBITED AND DECREASE WHEN CREDITED.

Question 18

In the acronym DEALER, what do Liabilities, Owners Equity, and Revenue represent?

Answer 18

These represent credits. They are the right hand side of the acronym DEALER. LER.

THESE INCREASE WHEN CREDITED AND DECREASE WHEN DEBITED.

Question 19

RECAP

Debits and credits reflect the ______ of ALL Financial Transactions.

Answer 19

Duality

Question 20

RECAP

Debits represent the flow of economic benefit __ a ___________.

Answer 20

To a Destination

Question 21

RECAP

Credits represent the flow of economic benefit ____ a ______.

Answer 21

From a Source

Question 22

RECAP

What can the Accounting Equation be rearranged to be to create the acronym
DEALER?

Answer 22

Dividends Liabilities
+ Expenses = + Owners Equity
+ Assets + Revenue

Question 23

Are Debits and Credits backwards in banking?

Answer 23

No, Debits and Credits are not backwards in banking!

It is commonly asked why debits and credits are backwards in banking.

Question 24

• Remembering that cash is an asset and it is a normal debit balance**

How do Debits and Credits affect asset accounts in Financial Accounting?

Answer 24

In Financial Accounting:

Debits increase Assets and Credits decrease Assets.

Question 25

• Remembering that cash is an asset and it is a normal debit balance**

How do Debits and Credits affect asset accounts in Banking?

Answer 25

In Banking:

Credits increase assets and Debits decrease assets.

Question 26

Why does it appear to have a direct contradiction in debits and credits when it comes to banking?

Answer 26

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.