Could someone write the same kind of article for chemistry ? That would help me to accept the fact that I didn't get it at all :-) Oh, while you're at it : accounting :-)
1. Memorize this: Assets + Expenses = Liabilities + Capital + Income
2. Everything is positive, no negative numbers!
3. For every transaction, Total Debits = Total Credits
4. "Credit" is source of money, "debit" is destination of money
5. Assets and expenses increase with debits
6. Liabilities, capital, and income increase with credits
7. Expenses and income may only be increased (debited & credited respectively)
8. At the end of the accounting period, distribute income less expenses to capital accounts
Example:
Your business buys a property for 90k with 50k cash down and 10k closing costs.
Assets: 90k house (debit), 50k cash (credit)
Expenses: 10k closing cost (debit)
Liabilities: 50k mortgage (credit)
Total Credits: 100k
Total Debits: 100k
But it gets even more confusing when they say "we credited your account" or "your account was debited".
From the perspective of the bank, your account is a liability, so when they deposit into it, then its value increases, hence "credit".
When they say "your account" they actually mean "the account where we track how much money we owe you".
From your business's perspective, your bank account is an asset, so when they deposit into it, then its value increases, hence "debit".
> From your business's perspective, your bank account is an asset, so when they deposit into it, then its value increases, hence "debit".
But what you're describing (a business depositing money into your account) is not what I, as a non-business owner, understand by "your account was debited". Businesses with whom I do (well) business use this terminology to mean that they have removed money from my account. (I'm not arguing with you—I've probably just misunderstood your terminology, and am seeking clarification.)
For example, suppose you go into the bank and withdraw $10 and they charge a $1 fee. The transaction looks like this:
* Credits: $1 (bank income), $10 (bank assets)
* Debit: $11 (customer liability)
So when you get your account statement, it will say "$11 debit", because from their perspective, it was a debit, i.e., their liability went down. If that doesn't make sense, think about how you pay your own credit card bill (a liability): you take money from (credit) your checking account and send it (debit) to your creditor.
Despite your very clear explanation, I'm still confused by:
> > But it gets even more confusing when they say "we credited your account" or "your account was debited".
> From your business's perspective, your bank account is an asset, so when they deposit into it, then its value increases, hence "debit".
Is it correct that the 'you' of the first post, in "your account was debited" (me the non-business owner), is the 'they' in the second post, of "when they deposit into it" (written from the perspective of the business owner, so that 'you' is no longer me)?
It doesn't matter whether you are a business owner; your bank account is still an asset to you and a liability to the bank.
Personal & business accounting are the same, except your only investor is yourself, so you don't have to manage capital accounts.
1) On your books, it is an asset account. 2) On the bank's books, it is a liability account.
When a bank says "your account was debited", they are talking about entity #2. That is, "the account on our books associated with 'you'".
But when you yourself think of the account, you think of thing #1.
Let's say you deposit some cash into your account at the bank. That means you are lending the bank the money (extending it credit). The bank records this as two transaction entries:
* A debit (receiving money) transaction which places more money into their general "money we have" pool: you gave them money.
* A credit (owing more money) transaction: they now owe you more money. This increases the amount of what the bank thinks of as "your account".
The statement they send you at the end of the month only shows the second transaction, because that's the one relevant to "your account" in the sense of #2 above.
If you were keeping books on your side, you would likewise record this as two transaction entries:
* A debit (receiving money) transaction for your bank account (now in the sense of #1 above).
* A credit (having less money in an asset account) transaction for your wallet.
So the upshot is that in the two entities that "your bank account" corresponds to, a debit for #1 is a credit for #2 and vice versa. And when the bank sends you a statement, it describes #2, not #1. Since most people don't interact with the terms "debit" and "credit" normally, this is the only exposure they have to those terms, so they learn them backward....
A balance sheet doesn't really speak to who might have claims to ownership of the company under what terms and the dollar amount of equity on the balance sheet doesn't imply that investors are owed that specific dollar amount.
When you receive capital in the form of cash, you debit your assets (cash) and credit your liabilities for the same amount (capital). It's "double-entry" accounting, total debits should equal total credits for every entry so that it balances out.
Capital+liabilities explain how your assets are "covered". Either you owe someone for the assets (liabilities), or you own the assets yourself (capital).
Sometimes it's easier to think of this as
"assets - liabilities = capital".
I.e. whatever is left after considering what you owe, you own.
If you have some cash (an asset), then you need to also list it either as a liability or capital, simply because you must always be able to answer "where did this cash from? did we borrow it (liability), or do we own it (capital)?"
A balance sheet is like charge on an array of loosely connected capacitors (or batteries). I know I got a pile of electrons (and holes) stacked up somewheres, and the balance sheet shows where. All "accounting circuits" are electrically neutral and the number of electrons and holes on your balance sheet MUST match.
A income sheet is like looking at the individual cell results from a solar array in parallel. So you got 10 aH out of that entire array, now which cells contributed more or less of their share, and which battery cells soaked up more or less than their share of charge?
The cash flow sheet tells you how fast electricity energy moved, essentially a power. So your 99 watt-hour laptop battery holds 99 watt-hours, but how many times did you fill and empty it in a year, how many times did you turn over the energy in the battery?
Once you learn op-amps you can do some hideous analog computing analogies, but don't call up what ye can't put down, so I'm not even trying that. So a financial derivative is like a sample and hold ckt connected to a four quadrant analog multiplier and a log/antilog ckt, or maybe this is just too far of an analogy not to be nonsense.
The purpose of accounting (aside from mere control fraud prevention, at least optimistically) is to squirt out some ratios to help make management decisions. Much like the transistor collector current is not terribly interesting nor is the emitter current at a large enough scale, but the ratio is exciting because back in the old days people made management decisions to select one transistor over the other based on the ratio of those currents, which is essentially how good of an amplifier it is. Much as income statment vs cash flow ratio tells you a lot about a retail establishment compared to its peers, how long "stuff" is sitting on shelves before getting sold. That current ratio is a bipolar transistor alpha ratio which no one uses anymore. Kind of like how people used to make investment decisions based on the ratios in the famous Graham and Dodd book, but no one has invested on fundamental ratios in, gosh I donno, 30 years? Its been a long credit bubble and fundamentals don't matter in a credit bubble.
I have no idea what a credit bubble is in EE terms. Some twisted analogy of trapped charge on a Teflon dielectric resulting in an integrator getting saturated eventually, but until it does the ride is pretty exciting.
I would extend this post with my traditional HN automobile analogy but I'm not sure there's enough liquor in the world to achieve that level of debauchery. So ... Keynesian economics policy sees the role of the government as like an electronic speed control on the automobile, uh, kinda.
I don't, I think it stays too much on the surface, in order to make the belabored analogy work.
This may also be interesting to you: http://www.dwmbeancounter.com/tutorial/Tutorial.html
I feel better :-)