if you're willing to take some time to learn some empowering definitions then making debits and
credits will be one of the easiest things you have ever done in this video we're going to learn the
definition of six simple word phrases and we're going to take our time and thoroughly discuss it
so we're absolutely sure we know what they really mean the first definition we will learn is income
from service it's a t-account that we use to record each event when we earned income from
a service a service income is money you earn for doing what you normally do in business of course
you don't only have to have a service business you could have a merchandise business and you
would earn income in a merchandise business at the moment you deliver the merchandise to the
customer you earn income in a service business at the moment you deliver the service there's
one tea account that you should record all the income which means all the money that comes in
from that particular service and it's very easy to record it in the t-account income will only
be credit never debit that means if you're recording income and you record each event
where you've done a service and earned income you should see transactions listed only on the
right side the credit side because that's the way it goes and I'm going to show you the reason for
that a little later in this video and now I will introduce you to a very important account when we
study accounting this account is called accounts receivable accounts receivable is the total money
that all customers owe you for selling them stuff or doing stuff for them like the income that we
mentioned a moment to go if Allen owes you $30 for delivering a service in the past and Betty
owes you $40 and another customer can do you $50 then in that case the balance of accounts
receivable the t-account at this moment should equal a hundred and twenty dollars that's the
reason for it it equals the total balances of all customers at any given moment so accounts
receivable is an asset because it represents money that you will receive in the future and
as you know assets are plus four debit and minus four credit that means if a transaction requires
that you write down you will receive more in the future you'll put that on the debit side but if
you will receive less in the future as a result of a specific transaction then that transaction
would be listed on the credit side so if we take a look at an example if Alan did a service or excuse
me if we did a service and Alan promised to pay in the future well that means you will receive more
in the future so the account receivable account will be debit because it's plus you will receive
more in the future and of course the other account will be credit and in this case like usual it'll
always be income credit now what about this we did a service for a different customer even
though we did a service for a different customer it should still be debit for accounts receivable
because that customer promised to pay in the future so the total money that we will receive
from all customers in the future will be more as a result of transaction be so transaction B is debit
however if we have a transaction that requires that we decrease accounts receivable because the
transaction means that we will receive less in the future as a result of that transaction then
we would have to make a credit so if one of the previous customers who owed money pays some of
the money that would be accounts receivable credit because we will receive less in the future so even
if a different customer paid any customer who pays we have to make a credit to accounts receivable
and a debit to the other account involved in the transaction usually cash because we got more cash
but this is how accounts receivable behaves and it will be matched to each individual customers
balance so that the total of each individual customers balance will always equal the balance
of this t account accounts receivable now most people already know the definition of this next
word expenses you could think of them as the opposite of the first definition that we learned
in this video expenses are like the opposite of income income is money that we earned for
performing a service expenses are money or monies that we must pay to be able to earn
the income if we don't need to pay the money in order to be able to earn income then it's not a
valid business expense and of course we would not write down all the expenses in only one t
account if we needed to pay for delivery in order to earn income from our customer we would record
all of the deliveries and only the deliveries in a t account call delivery expense if we had
to pay for repair in order to service a customer we would record all of the repairs or rather each
time that we paid for a repair we would record that instead into this account repair expense
and expenses are only debit never credit so if you are recording your expenses and you look
at any of your expense t accounts in your general ledger or your chart of accounts you will see only
transactions listed on the left side never on the right side because expenses are only debit never
credit remember expenses are like the opposite of income and earlier we learned that income is only
credit never debit so expenses are only debit never credit and I'm going to explain why at
the end of this video and just like expenses are the opposite of income accounts payable is the
mirror opposite of accounts receivable accounts payable is a t-account it is a liability and it
represents the total money that your business owes to people or companies who did a service
for you for example if you owe Rex repair shop $30 for a repair service or you owe FedEx $40
for a delivery service then that means the balance in the t-account accounts payable should equal $70
it represents the total money that you owe to all vendors at any given moment accounts payable is
a liability that means that it's - for debit and + for credit so if we have a transaction
that requires us to increase what we will pay in the future then we will make a credit to
account payable even if that transaction is from a different vendor we will still make a credit to
account payable and a debit to the other account usually an expense like a service that we received
from of course if we record a transaction that reflects the fact that we all s to our vendors in
the future then for that transaction we would make a debit because we would pay less in the future as
a result of that transaction of course the other account involved would be a credit usually cash if
we're paying off some of our vendors so that's the way accounts payable would behave in the general
ledger when you record your debits and credits and finally I will clarify the proper way that owner's
equity transactions should be recorded they should not be recorded the way I demonstrated in previous
videos of course we don't have only one T account to represent the entire category of owner's equity
I only showed it that way before just for you to get the idea the real truth is that there are two
separate owner's equity accounts one is called owners capital and the other is called owners
withdrawals owners capital is the T account where we record the owners equity transaction when the
owner invests any asset cash or equipment or anything when the owner invests any asset we
record that only in the t account capital and we always make a credit because capital is always
plus - owner's equity because all it represents is what the owner put into the business from his or
her personal pocket so that's why capital is always a credit never a debit now the
exact opposite of that account is the one right here on the Left withdrawals this account will
record any time the owner takes out any asset from the business whether the owner withdraws
cash equipment or anything the owner remove from the business to be used for non-business
reasons would get recorded in this account on the left owners withdrawals and every time the
owner withdraws any asset from the business the owner has less owner's equity so withdrawals is
always - - owner's equity and therefore you have to make a debit every time the owner withdraws
money or asset from the business in fact you could even say that withdrawals is always debit never
credit now in closing you should know that owners capital and owners withdrawals are not the only
accounts under the category of owner's equity the other two accounts under the category of owner's
equity are the two accounts that we learned about right here in this video both expenses and income
are also technically under the category of owner's equity that's because expenses always make owner's
equity go down because the person responsible for the expense is the owner and income always makes
owner's equity go up because if a customer gives money to the business it's the owners money that
the customer is giving after the sale or after the service so these four accounts are technically
under the category of owner's equity and they make debits and credits very easy I hope that you will
use your accounting textbook to understand a little bit better why these accounts are
under the category of owner's equity but if you have a transaction with any of them you should
always know what to debit and what to credit if one of the two accounts in your transaction is
either withdrawals or an expense you will have to debit the withdrawals or expense and credit
the other account if your transaction requires that you use the owners capital account or the
income account then you know for sure you're going to make a credit to either income or capital and
the other account and the transaction should be debit so now your adventure of debits and credits
should actually be easier by understanding the meaning of these four items under owner's equity