How to Explain Debits & Credits

Video Transcript

"In this clip we're going to talk about understanding debits and credits. For a lot of students this is the most complicated piece of learning accounting. However, once you get it straight, it's actually pretty simple. But there are a few rules you need to memorize. I'm going to show you some of the basic accounts, and how their debit and credit sides work. So the definition of a debit is simply the left side of your general ledger, and a credit is simply the right side of your general ledger. There's not really any other way to describe it, because as you can see, a debit is a negative for some accounts and a positive for others, and the same goes for credit. I just wanted to show you how debit and credit works for a few of the main types of accounts. For our income statement accounts, it's kind of backwards to how it works for the balance sheet accounts. So, lets pretend that you made some money, you got some revenue. If you wanted to increase your revenue, you would credit it, and with money comes actual cash. So since you always have two sides to an entry, a debit and a credit, you would know that if you had a credit to your revenue, you would have to debit your asset account or your cash account. So you can see that the income statement side is basically opposite to the balance sheet side. For expenses, a debit is an increase and a credit is a decrease. So lets say you spent some money, you would debit your expense account, but since you need to pay for that, say you spent that money on your credit card, and now you need to pay your credit card, you would then debit the liability account to pay for it. As you can see once again the expense and the liability are opposite, because there's always two sides to your entry. I wanted to show you how I like to think of debits and credits, and how I like to think of accounts. I like to think of accounts as buckets, or bowls, and you're simply putting things in, or taking them out, and those add up to a total, so debits and credits help you do that. Lets pretend the left side is our income statement, and the right side is our balance sheet. Lets say we made some money, to make money we would credit revenue, or add to our revenue account, and since we got paid some money, we would add to our asset account. So you can see, that a credit to revenue, and a debit to our asset, we've added things to both of those accounts. Now lets say we had to return some money to that customer, we would have to take it out of revenue, or debit revenue, and take it out of the asset account, and debit cash, we still have a balance in both of those accounts, but the balance is now one blue stone instead of two blue stones. I think that if you practice doing this exercise at home, with debits and credits, it'll really help you get a handle on how they work."