Mark Farber: Hi.
I'm Mark Farber.
This is Accounting Fundamentals Videos.
What we want to do in this video, is take a look at T-Accounts and the dreaded debit
and credits.
We're going to start to talk accounting, so to speak.
A lot of students have difficulty with this, so you want to, kind of take care that you
understand it, because as we move forward, this is the language that we're going to use
as we talk about all of our accounting.
A T-Account, to just right into it is nothing more than a means of keeping track of the
amounts that are kept in a particular account.
Call it a T-Account, obviously, because it's in the shape of a T. If we go over, and we
take a look at our T-Account over here, what we'll see is that it has two sides.
They have very technical names.
This side over here is called, the left side of the account, and this side over here, you
guessed it, is the right side of the account.
They also have different names.
In accounting, we refer to the left side as the debit side, which we often abbreviate
as Dr., which is Latin for something.
On the right side, we call that the credit side, which is abbreviated Cr., which is nothing
more than short form for credit.
What does that all mean?
Well, what it is, we have one side for keeping track of increases in an account, and the
other side for keeping track of decreases in an account.
Why don't we just call it the plus side and the minus side?
Well, that's the trick in accounting.
You see, which side is the increase, and which side is the decrease, depends on the account.
Let's go back to our accounting equation over here.
What I can do, is I can ... I'll just put this in like this.
I can turn that into a little T. And, what you'll see is that on this side of the T,
the asset side, is the debit side.
This liability and equity side of the equation, is the credit side.
Assets are referred to as debit accounts.
And what that means, is that when debit and asset, or if we wish to increase an asset,
we debit it.
A debit, on the asset side, Dr. Equals plus.
The credit accounts over here, liabilities and equity, work exactly the opposite way.
I told you this gets confusing.
When we want to increase the liability, or increase an equity account, we credit it.
On this side, a credit equals a plus.
The opposite holds true, so a credit to an asset, is a minus.
If I want to decrease cash, I would credit cash.
If I wanted to decrease the amount of equipment I had, I would credit equipment.
And, a debit over here, is a minus.
If, I increase a bank loan.
A bank loan is liability.
If I want to increase it, I would credit the bank loan.
If I want to decrease it, I would debit the bank loan.
Well, why do we do all of that?
Well, there's another simple truth that holds in accounting, and that's this.
Every time we do an account, the debits have to equal the credits.
This becomes a really useful way of keeping track of, as we record transactions, is our
accounting equation in balance.
After all, if my debits equals my credits ... Well, if I increased an asset, I debited
it.
And I increased the liability, I credited it.
The debit would equal the credit, and I'd have a plus on both sides of the equation.
Similarly, if I increased an asset, so I debited it, and I decreased another asset, I credited
it.
My debit would equal my credit, and everything would hold.
This is a very simplified way of making sure that every time we do a transaction, that
our accounting equation is going to remain in balance, without us having to go back and
check it.
All we have to know is that the debits equal the credits.
Okay?
This is referred to as double entry accounting, meaning that every entry that we do ...
Every time we record a transaction, there's going to be a debit, at least one debit and
one credit.
There can be more, and we'll see that later on.
But, if you think back to our last video, where we looked at some transactions, cash
went up, when we had an investment, and capital went up.
And now, instead of talking about pluses and minuses, what we're going to do, is we're
going to start to use debits and credits to denote when something goes up, and when something
goes down.
Okay?
Um, in our next video, what we'll do, is we'll actually start to look at some transactions,
and this time we're going to record them, using debits and credits, so really important
to get this under control in your head, and we'll go from there.