Debits and credits explained

This video explains debits and credits.  It should help accounting students and especially anyone interested in learning bookkeeping.  Enjoy:

[I’m especially proud of the closed-captioning.  Check it out.]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

5 Responses to “Debits and credits explained”

  1. Thank you so much for the information. It is very clear and helpful.

  2. Hi Mark
    I don’t understand the need to mess around with the basic equations. What’s the benefit. If we start with this:

    assets(A)+expenses(E)=liabilities(L)+owner’s equity(E)+revenues(R)

    and by simple algebraic manipulation, we arrive at this

    A+E=L+O+R

    what is the advantage?

    As an example, let’s say that I had 10€ to invest (O=10) in a business activity, where the expense of doing business was also 9€ (E=9), but it generated 90€ (R=90), with 0€ cost in liabilities (L=0)

    Using the first instance, we arrive at:

    91 = 0+10+90-9

    where the profit (A) rests on one side, and costs and results of doing business are on the other. If revenue is lower than costs, then the ‘profit’ figure will be negative too, i.e. a loss.

    By combining Assets and Expenses on the left side, we get:

    91+9 = 0+10+90

    But what is the advantage of presenting the information in this? I understand that debit accounts are assumed to be positive, and credit accounts are assumed to be negative, but there seems a fundamental logical ‘flip’ in order to make the equation work this way – income has to be seen as a ‘negative’ account, though it is assumed to ‘add’ income, while expenses has to become a ‘positive’ account, even though expenses are ‘minuses’ for the bottom line.

    Is this just a way of trying to avoid working with ‘negative’ numbers, by avoiding have to ever use negative numbers in the accounting? If the company makes a loss, then the balance sheet will show negative numbers anyway. Negatives are only avoided if the company is in profit. But I guess in terms of inputting data, everything works in positive integers, i.e. withdrawals/deposits, payments/charges, expenses/rebates, even when the underlying effect on ‘assets’ is negative.

    I’ve been trying to bend my head around these concepts for two days, and they seem so arbitrary and contradictory, while ‘debits’ and ‘credits’ are in themselves a further non-intuitive ‘reinterpration’ of ordinary language. Seems like accounts are making things complicated just for the sake of it. Or is there a benefit that I’m not seeing?

    Anyhow, I think your YouTube video certainly gave me a better handle on this stuff than anything else I’ve read. Thanks.

    • You could rearrange the equation in different ways – that’s okay. But assets and expenses are the “debit accounts.” Liabilities, owners’ equity, and revenues are all the “credit accounts.”

      The main concern here is constructing a system that works and is practical to use. This system was developed in Renaissance Venice by Luca Pacioli. I don’t have historical evidence for this or anything, but it seems to make sense – a practical constraint was that it’s relatively easy to add up a column of positive numbers but much more time consuming to add up a list of number where some are positive and some are negative. Hence, by separating debits from credits, the accountant only needs to add both columns (which all have positive numbers).

      Losses obviously could happen – but these still fit within the debit/credit system. Losses are situations where expenses and losses (all debit accounts) exceed revenues (credit account). Hence, a loss would result in a net debit, which would later be debited to equity.

      You wrote: ” I understand that debit accounts are assumed to be positive, and credit accounts are assumed to be negative, but there seems a fundamental logical ‘flip’ in order to make the equation work this way – income has to be seen as a ‘negative’ account, though it is assumed to ‘add’ income, while expenses has to become a ‘positive’ account, even though expenses are ‘minuses’ for the bottom line.” There is no general assumption that debit accounts are positive and credit accounts are negative. Debit accounts with debit balances are positive – those with credit balances are negative. Likewise, credit accounts with credit balances are positive – those with debit balances are considered to be negative. Many computer software programs confuse this by using only one column. Instead of having separate debit and credit columns, they use only one column, where debits are positive and credits are flipped around to be negative. Hence, add your debits and subtract credits, and it’ll all add up to zero.

  3. Oops … the first equation should be A=L+O+R-E

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