in this video I'm going to explain to
you what debits and credits aren't
define them and show you why this is
going to help you out hey guys my name
is James and welcome back to another
episode of accounting stuff this video
is the second in a series that I'm
creating on accounting basics if you
missed the first check out the link that
I'm putting in the description below
this video is going to be all about the
differences between debits and credits
make sure you stick around to the end
because I've got a tip I think is gonna
help you loads o exciting stuff are you
ready let's do this
to properly understand debits and
credits I think it's important to make a
couple of points clear so we can remove
any misconceptions debits and credits
are neither good nor bad debits and
credits are not the same as adding or
subtracting debits and credits are words
used to reflect the duality or
double-sided nature of all financial
transactions if you need an analogy to
help you visualize this then you can
think of debits and credits as heads and
tails on a coin since there are equal
and opposite sides to every transaction
in the world of finance money doesn't
magically appear or disappear for money
to go to one account it has to come out
from another accountants consider every
transaction to involve a flow of
economic benefit from a source to a
destination what is he gonna make
benefit economic benefit is the
potential for an asset to contribute
either directly or indirectly to the
flow of an entity's cash I was saying
that accountants consider every
transaction to involve a flow of
economic benefit from a source to a
destination
well credits represent the source and
debits represent the destination
destinations that economic benefit can
flow to include assets like cash
buildings and amounts owed to you by
others but also expenses where business
pays a third party for a good or service
they have provided and dividends where a
business distributes some of its cash to
its owners on the other hand sources
that economic benefit
flow from include owners equity where
businesses owners give their cash to the
business liabilities such as amounts
owed to a bank in exchange for a loan or
to suppliers for providing a good or
service and revenue so let's bring back
up that accounting equation that we
discussed in the previous video and I'll
prove this to you assets equal
liabilities plus equity now we know that
assets are represented by debits and
liabilities by credits
however equity is a tricky one to
understand it properly we have to expand
it into the components that make it up
now for disclosure here we're about to
do some maths don't be afraid we're just
gonna do some simple rearrangement here
if math isn't your thing maybe watch
this next section through a couple of
times so you can wrap your head around
it you'll be okay equity equals owner's
equity paid in less dividends paid out
plus retained earnings I said in the
previous video that we can think of
retained earnings as profit held for
future use well profit is made up of
revenue less expenses so let's replace
retained earnings in our accounting
equation with revenue less expenses we
have equity equals owner's equity paid
in less dividends plus revenue less
expenses and now let's take this
definition of equity and break it out in
our accounting equation assets equal
liabilities plus owner's equity paid in
less dividends plus revenue less
expenses and finally let's do a little
rearrangement so we have dividends plus
expenses plus assets equal liabilities
plus owner's equity paid in plus revenue
the left hand side represents debits
these increase when debited and
decreased when credited the right-hand
side is the opposite these are credits
these increase when credited and
decrease when debited now I mentioned at
the start of the video that I have a tip
for you to remember all this this is
gonna help you out well here it is
dealer de a el e our dealer if you are
ever in down which side of the
accounting equation these term sets on
then you only have to remember this one
word dealer right I think we covered a
lot there so let's recap some of those
main points debits and credits of words
used to reflect the duality or
double-sided nature of all financial
transactions debits represent the flow
of economic benefit to the destination
credits represent the flow of economic
benefit from the source debits include
dividends expenses and assets credits
include liabilities owner's equity paid
in and revenue this is reflected through
the accounting equation which can be
expanded and rearranged to show as
dividends plus expenses plus assets are
equal to liabilities plus owner's equity
paid in plus revenue an easy way to
remember this is dealer thanks for
watching today's video if you found it
useful give it a like if you're
interested in watching more don't forget
to hit that subscribe button that's all
for today see you next time
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