what our debits and credits anyway
we learned in the previous video that the assets of a company must be equal to the
liabilities plus the owner's equity of that company and we also learned that after each
transaction the equation must stay equal but in the previous video we recorded the transactions
directly under the item name as if we were adding them up and down in one column the correct way to
record transactions when we study accounting at the beginning is put them in things that look
like this these are the same numbers and the same asset balance is on the Left these are the same
liabilities and owner's equity balances on the right and it is still the case that the assets
equal the liabilities except now the numbers are in their proper position inside something
called a t-account now a t-account looks like the letter T hence the term and like everything else
in the physical universe a t-account has a left side and a right side now here's where the word
debit and credit come into play the word debit simply means left side the original meaning of
the word debit comes from Latin and all it means is left or left side and of course the original
meaning of the word credit comes from Latin and it means right side or right-hand side or
whatever you want to call it that's all it means all the other times you have used or heard those
words spoken they were being used as a metaphor from the original meaning from basic accounting
now here's what makes it challenging sometimes we put the positive numbers on the debit side but if
it's a different type of account in a different accounting category then instead we're going to
put the positive numbers on the right side the credit side and of course depending on the type
of account we might need to put the negative numbers on the debit side which is the left
side but again a different type of account in a different category would have the num negative
numbers listed on the right side the credit side so we're going to record the same transactions as
before and they're going to be recorded in the same items with the same positive and negative
numbers that we put before the only difference is the numbers will be on the debit side and
credit side instead of having a plus or minus in front of them the most helpful way to think of the
relationship between our fundamental accounting equation and the idea of debits and credits is as
follows assets were presented in this equation on the left side so you could think of them as
normally being on the left side which means they would normally have a debit side balance and in
the less frequent occasion where you have to put a minus to an asset you would put that on the credit
side of that assets T account and of course for liabilities and equity the idea is the same but
the exact opposite since they're listed on the right side of our accounting equation we could say
that they normally have credit side balances and in the rare occasion where we have to put a minus
to one of these we would put that on the debit side of that liability or that equity account
and this system will work perfectly so that after each transaction the accounting equation
will stay equal but only if after each transaction the debits equal the credits
that's the reason why you have to make sure the debits equal the credits because in the
system that you're looking at in this diagram it will make it so that the fundamental accounting
equation stays equal after each transaction now we'll do the same transactions as before except
every transaction will change two accounts one will be debit the other will be credit and the
result will be exactly as it was before now just like before we're starting with a total of 35
thousand in debit and starting with a total of 35 thousand in credit because the assets on the left
are thirty-five thousand and the liabilities plus equity are a total of 35 thousand just
like they were at the beginning of the previous videos transactions set now transaction a paid
three thousand cash for a new car now which two accounts do you think would change well if we
paid cash cash will change and we probably have less cash if we paid so cash will be - and since
cash is an asset the diagram tells us that we have to put that three thousand as a - two cash on the
credit side the right side of the cash account but you can't make a credit without a debit now the
transaction says the other account is the car and car is an asset and we have more car as a
result so if car is an asset and we have more the diagram says we put the plus on the debit side so
for transaction a the answer is cash credit card debit 3000 and the fundamental accounting equation
stays equal now let's try transaction be the owner invested 5,000 of equipment from his home to his
business well we did this exact transaction in the previous video where equipment went up and
the amount that this t-account measures as the owners investment in the company also went up
because the owner invested more we know that equipment is an asset and if we have plus 2
an asset the diagram tells us that we put that on the debit side and if equipment is debit and
the transaction says the owners investment is the other account then the other account must
be credit the owner's investment is credit because the owner has more equity in the company because
she or he invested more value in the form of the asset equipment transaction si is one that we also
did in the previous video pay $2,000 to decrease the bank loan well of course if we paid cash cash
has less and of course if we pay down the bank loan the bank loan has less well cash is an asset
and the diagram says if the asset has less we put that money amount on the credit side so therefore
bank loan must be debit in this transaction and you can see that bank loan is a liability and we
know if we pay to decrease the bank loan that the liability should be debit the way that we just put
here transaction D sold 4,000 of equipment for cash now of course this type of transaction is
rare because we're not really in the business of selling equipment but if we sold equipment and we
got cash it seems to me that equipment would go down because we sold some and cash would go up
because we just got some cash they are both assets so if cash goes up cash should be debit and if
equipment goes down equipment should be credit so just to see that again in slow motion the answer
to D is equipment credit because we have less equipment and cash debit because we have more cash
transaction e owner took home a car that costs 1000 well we had something like this in the
previous video or at least I think we did first of all if we took home a car this t account is
representing the businesses money amount of car not the owner the business is a separate entity
and it is the businesses T accounts that we're looking at so the business has less car and car as
an asset and it's decreasing and if the owner is taking asset value out of the company that means
they invested less so car must be credit because the business has less car and car is an asset
and car as - so car will be credit and if car is credit the other account owners investment must
be debit because the owner has less investment in the company because they took out some asset
transaction F borrowed 7,000 more from the bank 7,000 more cash that is so cash will go up because
we have more cash but on the other hand we owe more to the bank and this t account represents
what we owe so cash is an asset and because we have more cash and cash as plus cash is debit
if cash is debit then the other account in the trans the bank loan must be credit now does it
make sense to credit bank loan well the bank loan is increasing and a liability that's increasing
gets a credit so bank loan must be credit for transaction F for the 7000 therefore cash must
be debit and finally transaction G borrowed 6,000 more from the bank to buy a new car well we know
from a moment ago if the bank loan goes up that's a liability that's plus so bank loan will be
credit and if we have more car and car as an asset car will be debit so 6,000 credit the bank loan
because we borrowed 6,000 more from the bank and debit card 6,000 because we just got $6,000 more
of a car this is the idea of debits and credits it comes from the fundamental accounting equation and
now that we're done we're supposed to do what's called foot every account that means take all
the positive and negative numbers in each account and put them together and whatever remains shows
up as the ending balance if the positive numbers for assets are more that means you had more debit
than credit and you wind up with a debit balance so if you did the math yourself you will see cash
has a debit balance of 16,000 if you take the equipment account and put all the positive and
numbers together but positive and negative numbers together you will see that they are left over with
positive 21,000 and since equipment is an asset a positive balance goes on the debit side same thing
with car if you put everything together you'll see that during this exercise car had 13,000 more
debits than it did credits so it finishes with a $13,000 balance how much do we owe the bank
the end well we started would fit with 15,000 and twice borrowed more and that was listed on
the credit side and during this exercise we only paid back two thousand so if we tried
to find out how much is left on the bank loan we would see that we still owe 26,000 and because we
still owe that money to the bank it's listed on the credit side now the owners investment
transactions are not really done exactly the way we showed it here we only showed it for the main
idea but you can put together everything the owner put in and took out during the exercise
to get the net result so the net result of what the owner put in to the business was twenty four
thousand and now that we're finished you could probably do a little bit more elementary school
math and you can see the ending total debits equal fifty thousand and therefore the ending
total credits must also be fifty thousand that means the total assets are fifty thousand and
the total liabilities and equity are also fifty thousand and we did everything right