Bookkeeping Accounting Debits and Credits for BEGINNERS -Get the Complete Concept | Arafat . | Skillshare
Search

Playback Speed


  • 0.5x
  • 1x (Normal)
  • 1.25x
  • 1.5x
  • 2x

Bookkeeping Accounting Debits and Credits for BEGINNERS -Get the Complete Concept

teacher avatar Arafat .

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

    • 1.

      Indroduction

      1:21

    • 2.

      What are Debits and Credits

      2:30

    • 3.

      Types of Effects in Transactions

      11:23

    • 4.

      Capital, Liabilities, Income and Expenses

      5:54

    • 5.

      Apply Debits and Credits

      18:07

    • 6.

      Conclusion

      1:22

  • --
  • Beginner level
  • Intermediate level
  • Advanced level
  • All levels

Community Generated

The level is determined by a majority opinion of students who have reviewed this class. The teacher's recommendation is shown until at least 5 student responses are collected.

65

Students

--

Projects

About This Class

This course is for both who have an accounting background and for those who do not any accounting background. In fact I would suggest any beginner to first go through this course before embarking on other accounting courses because this course will introduce you to the very confusing concept of debits and credits in a very clear manner so that you will find no trouble catching up with the more complicated explanations given in other accounting courses.

In fact this course is well suited for higher learners as well to clarify their fundamental concepts of debits and credits. Many students still lack a clearer understanding on this topic even when they have already reached the higher stages of their studies.

So should be worth doing some lessons from this course!! Best of luck!

Meet Your Teacher

Teacher Profile Image

Arafat .

Teacher
Level: All Levels

Class Ratings

Expectations Met?
    Exceeded!
  • 0%
  • Yes
  • 0%
  • Somewhat
  • 0%
  • Not really
  • 0%

Why Join Skillshare?

Take award-winning Skillshare Original Classes

Each class has short lessons, hands-on projects

Your membership supports Skillshare teachers

Learn From Anywhere

Take classes on the go with the Skillshare app. Stream or download to watch on the plane, the subway, or wherever you learn best.

Transcripts

1. Indroduction: This course is about debits and credits. Very often, students fail to understand the basics of debits and credits. A firm grasp on the basics of debits and credits as fundamental to any accounting studies. This course has been created to clarify this concept to students of finance and non-finance backgrounds. This course teaches the most fundamental basics of accounting and can be taken by anyone without any pre acquired accounting knowledge. The importance of this course lies in the fact that this course handles the most confused accounting concept. Among the common problems that students face is a lack of a clear understanding of the meanings of the words debits and credits. In fact, debits and credits mean desirable and undesirable effects the transactions. But this concept is very badly understood by students most of the time. So initially we will learn the main meanings of debits and credits. And then we will apply this concept to various examples to learn this concept properly. So without further delay, let's begin the lecture. 2. What are Debits and Credits: So let's begin with the question, what are debits and credits? Instead of just learning that debits come on the left side and credit column on the right side. We rather need to know the main concepts behind debits and credits. Students who struggle with debits and credits even after completing their accounting degrees due to lack of understanding, this course is designed to clarify the core concepts so that you can apply seamlessly debits and credits to any transactions. And of course, equally applies to people from both finance and non-finance backgrounds. So let's begin at the end of this course. I hope you will not need another course to clarify your concepts on debits and credits. So let's begin. Debits and credits are the fundamentals of any accounting system. In the same way that 01 are fundamentals for any digital computing system. Every transaction comes with debits and credits. And the debits will always equal to the amount of credits. So we can say every transaction accompanies a pair of equal debits and credits. The other nature of debits and credits is that they are opposite in nature. So they are just like minus one and plus one. When edit together, they add up to 0. Question again, what really our debits and credits? Debits and credits are the desirable and undesirable effects of a transaction. So as I said, that every transaction comes with a pair of debits and credits. It also means that every transaction comes with a desirable effect and an undesirable effect at the same time. So when we buy something, our main objective is to attain or receives something. But in return, we give away money or we give away cash. So this happens with every transaction. That means every transaction comes with taking something and at the same time giving away something else. Therefore, we can easily see the desirable and undesirable effect in a transaction. But there are different types of desirable and undesirable effects. And in the next lecture, we shall study those different types of desirable and undesirable effects. 3. Types of Effects in Transactions: So what are the different types of debit and credit effects? And how do we classify them? Classifying debit and credit effects essentially mean classifying the desirable and undesirable effects in a transaction. So in one transaction, the desirable effect may be the receiving of a car due to purchasing of a car. And the desirable effect in another transaction may be the receiving of some goods for resale. Similarly, the undesirable effect in one transaction, maybe the paying of cash, while the undesirable effect in another transaction may be the giving away of a car due to the selling or disposal of that car. And again, sometimes we don't receive money immediately when we sell something, meaning when we sell on credit. So for example, if we sell some goods on credit for $500 and we don't receive the money immediately. What happens for the desirable effect? What is the desirable effect when we sell something on credit? Well, when we do sell on credit, the desirable effect is the right to receive money in the future. So we do retain a right to receive money in the future, and that is considered to be the desirable effect of that transaction. On the other hand, the undesirable effect of that transaction is of course, the goals that we have sold and which has been disposed off. So here is a classification of the different types of desirable effects. In other words, the different types of debit effects. The first type of desirable effect is the receipt of something. This here means the receipt of something directly. For example, when we receive an asset, when we receive a car, when we receive a building, when we receive some cash, when we receive anything valuable. That is the first type of a desirable effect or the first type of a debit effect. The second type of debit effect is to retain or to gain the right to receive something in the future. So when we sell something on credit, we retain a right to receive money in the future. So that is an example of a right to receive something in the future. The second type of debit effect, the third type of debit effect is when something increases without receiving anything from outside. For example, we do own a land already. And what happens if the value of the land increase? Did we receive something from outside to increase our land value? Of course not. The land value itself grew. So this is not something we received from outside, but the effect is the same that we. Have an increase in the value of our land. This is the third type of a debit effect, which is desirable effect and of course a debit effect. Now, the fourth type of debit effect, this is essentially the decrease of credit effect, that decrease of an undesirable effect. For example, we owe money to people and what happens if they forgive us, if they gave us a discount or if they gave us all together, we become relieved of that liability. So a decrease in a liability is a desirable effect and a debit effect. The decrease in, decrease in a liability can be caused due to forgiving of that money or due to a discount. Or even it can happen when we are really able to pay up for that amount. So let's analyze what happens when we pay our dues. So if there is a dew of $50 and we end up paying that amount, what are the desirable and undesirable effect of this transaction of paying $50 and reducing the deals to 0. Of course, the undesirable effect is the cash outflow that we have paid $50 to settle our dues. So the cash outflow is the portion which is undesirable in that transaction. The desirable effect of that transaction is relief that we receive from paying our dues. Our deals becomes 0 and we don't owe money anymore and we are relieved. And this is a decrease in our liability. So this is the desirable effect that relief that we have got, and this is the debit effect. The last type of her debit effect is the relief that we get from paying our dues to the owner of the business. The owner of the business invested capital in the business. And this is a liability that we owe to the owner of the business. The investment of the owner is a liability towards the owner. And if we settle this liability by paying up some of the amount than some of the liability towards the owner decreases. And this is a relief from that liability, partial relief from that liability. And this relief is another debit effect and a desirable effect. And the undesirable effect in this transaction is of course, the cash outflow. The cash that has been paid to the owner to settle some of the liability towards him. So that cash outflow is, of course, the undesirable effect. But why do we consider the owner of the business as a separate entity from the business itself and paying the owner the liability towards the owner and relief from the liability towards the owner as if the owner of the business is a separate entity from the business itself. Why is that? So we are going to learn about that a little later in a different lecture. Different lectures. So let's wait until that lecture. But for now, let's remember that the owner of the business is not the same entity as the business itself in accounting terms. So let's fix this in our minds that the owner of a business is not the business itself. Now let's move on to the undesirable part. And let's see how we can classify the different types of credit effects. The first type of credit effect is ofcourse, giving away something directly, for example, giving away cached in a transaction. Or when we sell something, giving away the thing that we are selling, when we are selling some goods, we give away that goods. So these are the things that we are giving away directly. And this is the undesirable part, and this is the credit effect. So let's move on to the second type of an undesirable effect in a transaction. So the second type is to cause a decrease in something that we already have, but without giving it away to somebody else. So for example, we have land and the value of land decreases. So this is a decrease in the value of something that we have without giving it away to anybody else, the value of the land sale decreased. So this is an undesirable effect and this should essentially be recorded with the credit. The third type of undesirable effect is the decrease in their right to receive something in the future. So for example, when we sell something on credit, we retain a right to receive money in the future from the customer. But what if the customer defaults and escapes and we cannot claim the money back? So the right to receive the money decreases. We won't receive the money in the future. So this is an undesirable effect and should be recorded with a credit. Furthermore, their right to receive money in the future also decrease. Also decreases when the customer pays it up. So when the customer pays the money, we do not retain anymore, right? To receive money in the future, even in that case, this is an undesirable effect that we lose the right to receive any more money in the future as the customer has already paid. And this is a credit effect. The fourth type is, again, a very clear one. That is to record the obligation to pay to third parties. So for example, when we buy something on credit, we get the obligation to pay money to the suppliers in the future. So here we get an obligation to pay in the future, and an obligation is not something desirable. The obligation is an undesirable effect of the transaction, and this negative effect should be recorded with the help of a credit entry. The fifth undesirable effect in a transaction is when an obligation to the owner is created. So instead of an obligation to a third party, the obligation here is to the owner of the business. As we said earlier, the owner of the business is not same, the same as the business. The owner is a separate entity from the business. So there can be an obligation to the owner of the business. The obligation can be created because the owner invested money in the business and the business owes the owner money back. So this is an obligation towards the owner of the business to pay the money back, to pay the capital invested back to the owner. So such an obligation known as capital, should be recorded using a credit entry. This is an undesirable effect from the perspective of the business, that the money has to be paid back to the owner and it's an obligation and this also has to be recorded with a credit entry. So we had initially learned what our debits and credits, what are desirable effects of a transaction, and what are the undesirable effects in a transaction. And then we learned about the debits and credits and also the types of debits and credits. In this lecture. In the next lecture, we will learn about different terms, about different items of accounting and whether those are desirable or undesirable in our accounting system. And we will analyze those terms, the terms that we are going to see in the next lecture, our capital, expenses, income, and liabilities. So let's move on to the next lecture. 4. Capital, Liabilities, Income and Expenses: Welcome to this lecture on capital and liabilities, income and expenses and drawings. These are important items in an accounting system and we shall explain the implication of each item in the accounting system and whether they are considered to be desirable or undesirable effects and recorded using credits or using debits. The first term to be recorded weight is the term capital. Capital is the amount invested by the owner into the business. As learned from the previous lecture, capital is an amount owed by the business towards the owner. The owner has invested money into the business, and the business being a separate entity from the owner. The business therefore owes this money back to the owner. Owing something to somebody. Accounting is referred to as a liability. Liability is an obligation to pay somebody else, beat a third party or the owner himself. So a liability is an undesirable effect in an accounting transaction. Liability is an obligation. And as said in the earlier lecture and obligation, an obligation is an undesirable effect in a transaction, and this obligation should be recorded with a credit. Capital therefore, is always recorded with the help of a credit entry. The next term is income. Income increases capital and income is considered to be part of capital. So as income increases, capital increases, income helps capital to grow. And the more the income will increase, the more that capital will increase. So income is not a desirable effect from the perspective of the business, because this is an amount or a part of the capital. And capital means an obligation to pay back to the owner. So the more the income increases, the more obligation to pay that income to the owner increases. So income should be recorded with a credit entry, and this is an undesirable effect of a transaction. So when does income arise and when should we record and identify and income? This is a fundamental topic which students usually are not very clear about. So income arises whenever we sell something. So whenever we sell a land, a building, or some goods, we generate income. And then we of course recognized this as a credit entry and recorded with the help of that credit entry. These are some of the examples of income. In other words, revenue from selling anything is called income. So we can generate revenue or we can generate income by selling goods. Earning interest income, earning rental income, earning dividend income. These are all income and these are all recorded using credits. The next item is expenses. Expenses are just opposite to capital, and expenses, they reduce capital just opposite to what income does. Income increases. Capital, expenses, decreases capital. As we know, capital is an obligation towards the owner. Now expenses reduce capital. Expenses, reduce obligation, expenses reduce reliability. So reduction of a liability is a good thing, is that desirable effect? So expenses are recorded using debits. So expenses are not undesirable effects. Rather, expenses are considered to be desirable effects because expenses reduce the liability of capital. So here are some examples of expenses. These are very common examples. Electricity bills, hating bills, rental expenses, stationery expenses and wages expenses. The next item is drawings. Drawings or withdrawal of money back by the owner and reduces the amount of capital. S capital is liability towards the owner of the business. Drawings essentially decreases this liability. Drawings therefore is a desirable effect and should be recorded using debit entries. We have learned previously that anything that reduces liabilities is a desirable effect and this is an application over here. The last item is a very clear item and that's liabilities. Liabilities means to owe someone money. Therefore, definitely this is an undesirable effect and should be recorded using credit. So liabilities should always be recorded using credit entries. Liabilities, however, are of two types. One which is owed to third parties and the other which is owed to the owner of the business. The term used for liabilities owed to the owner of the business is capital, and capital is a credit item. In summary, expenses and drawings are Davids and income, capital and liabilities are credits. Now let's move on to the next lecture and see how to apply debits and credits in real transactions. 5. Apply Debits and Credits: Welcome to how to apply debits and credits. So far we have learned to apply debits and credits theoretically. Now let's try to apply debits and credits to real transactions. Let's keep in mind that debits are desirable effects and credits are undesirable effects. Let's also remember that expenses and drawings are debit entries and that liabilities, income and capital R credit entries. Let's say Mr. a. Has bought a car for $5 thousand and he has paid the amount in cash. So he received a car from this transaction and lost some cash from this transaction as receiving the car is a desirable effect. So we shall record it with a debit entry. And the loss of the cache is the undesirable effect and shall be recorded using a credit entry. The two effects here are recorded using two separate accounts. One is the car account, the other is that cash account. So remember to record the different effects we need to identify the different accounts. So let's say this time he buys Dakar on credit. So again, he receives the car and the car account is debited. But he does not pay any cash upfront. So the cash account is not undesirable affected. So what is the account which has been undesirable affected in this case? Did this transaction create an obligation to pay the money in the future? The answer is yes, we indeed have an obligation to pay the money in the future. This is known as a liability. An obligation to pay someone is known as a liability. This liability is the undesirable effect of this transaction. That term here used is payables to denote the ith liability and payables should be credited. The car account is debited and the payables account is credited. So what happens when Mr. a. Decides to pay the amount due here will lose money and his cash account should be credited. And is liability to pay the amount deal will reduce. So payables account should be debited. Remember when liability reduces, this becomes a desirable effect and is recorded using debits. So we debit the payables account to denote the decrease in liabilities. Let's look at another example. Here. Mr. Hay bought some goods for cash, $5 thousand. So what did he gain from this transaction and what did he lose? Obviously, he got some goods. And goods are known as purchases in accounting. So we need to debit the purchases account to denote the desirable effect of receiving these goods. So I think to learn here, parties is, is the account used to record the receipt of goods. And what did he lose? Obviously in this transaction, he lost cash. So Mr. a. Has less cash now, his cash accounts should be credited. This is the undesirable effect of this transaction. Let's say he bought some more goods. But this time he bought them on credit. So this time we will again debit depart Chase's account to denote the receipt of goods, which is a desirable effect of this transaction. The undesirable effect is not in the cash account as cash has not been paid out. But an obligation to pay the cash in the future has been created. This obligation is recorded in the payables account using a credit entry. So the desirable effect is recorded in the purchases account and the undesirable effect is recorded into payables account, which is a liability account. Remember the purchases of goods are recorded in the Parcheesi is accounts not a Goods account. The name of the account is part says is now let's say Mr. a. Pays this amount due. So if he pays the amount due, his cash will reduce. This is an undesirable effect and cash account should be credited. And at the same time he is being benefited. The benefit is that he's liabilities have been reduced. So this time his liabilities account has been positively affected, meaning desirably affected. The name of his liability account in this case is payables account. So we have to debit the payables account to denote the positive impact in this account. Note that the decrease in liabilities account is recorded in the liability account itself with a debit entry. Remember that decrease of liabilities is a desirable effect and should we recorded using debit entries? So the debit entry should be recorded in the liability account itself. Here, it's the payables account. Let's take an example where Mr. A's sell some goods. We have learned in the previous lecture that selling creates income or revenue. In this case, as Mr. A's sell some goods, he is generating income. At the same time, Mr. A is receiving cash. Receiving cash is something desirable so that cash accounts should be debited to denote this desirable effect. As we are sure that income has been generated. So an income account should be created and credited because we have learned that income increases capital. So income should be credited. So the account used to, for, used for income is the sales account. So remember, the sales account is used to denote degeneration of income. We need to credit the sales account in this case. Also remember, why is income considered to be an undesirable effect? Income increases capital and capital is a liability towards the owner. Capital is an undesirable effect and income also increases this undesirable effect by increasing the amount of capital. So that's why income should be credited whenever income is generated. So what if Mr. a. Decides to sell some goods on credit? He decides to receive that money later in the future, instead of receiving it up front. Again, as he is making some cells, he's selling some goods. We are sure that he is generating income. So the income account, known as the sales account, should be credited in the first place. Secondly, he's gaining the right to receive the money in the future. The right to receive the money in the future is a desirable effect. And this desirable effects should be recorded using a debit entry. In this case, the account to be used to be debited is their receivables account. The word receivables mean their right to receive the money in the future. So we need to debit the receivables account to denote this desirable effect of receiving, of having the right to receive the money in the future, the account's name is receivables. So what happens when he finally receives the money, which is the account which is desirably affected, and which is the account which is undesirable affected now that he finally has received the money as he has received money, of course, his cash account has been desirably affected. The amount of his cash has increased. So we need to debit the cash account to denote that desirable effect on this cash account, we need to ponder upon what the undesirable effect could be. Initially, he had a right to receive money, but now he has already received that money. So he has lost that right to receive the money anymore. So now he doesn't have the right to receive any more money. He's receivables account should be credited. Remember that his right to receive money was recorded in the receivables account. Now that the right to receive money has been undesirable affected. So his receivables account is the account which should record this credit entry or this undesirable effect. Now let's look at a transaction relating to expenses. Here, Mr. a. Encouraged stationery expenses for cash for $5 thousand. Clearly cash has gone out and cash account needs to be credited. But what about expenses? Didn't we learn that expenses reduce capital? Expenses are opposite to income. Income is the one which increases capital expenses is the one which reduces capital. Capital is a type of liability. Capital is a liability towards the owner. Expenses reduce this liability, meaning expenses reduce this amount of obligation. So expenses is a desirable effect. So in this case, the expenses account should be debited. So what if he encouraged the same expenses on credit? Again, expenses should be debited, but cash should not be credited as cash has not gone out. So the cash account has not been affected. But an obligation to pay cash in the future has been created. This is an obligation to pay in the future, and this is a liability. And the term used for this type of liability is payables. So the payables account should be credited to denote the liability. Mr. a. Next goes on to pay the amount due the amount due for stationary. So again, what happens when he pays up his dues? When he pays up his deals, his dues are his liability decreases. Decrease in the liability is a desirable effect. He no more has to pay this to you again in the future. He no more has this obligation for the future. So the obligation has been reduced. The obligation had been recorded in the payables account. Now, the payables account has been desirably affected. So we need to debit the payables account to denote the decrease of this liability. The decrease of this liability has of course been effected by the payment of cash. So cash has gone out and the going out of cache is an undesirable effect. So the cash account has been undesirable, affected, the cash amount has been reduced. So this should be recorded with a credit entry to cash. Accounts should be recorded with a credit entry to denote the decrease of cash. Let's look at a transaction relating to income this time. Here, Mr. a. Receives rental income of $5 thousand in cash. He has received cash, so his cash has gone up. So his cash account has been desirably effected. So we need to debit his cash account. On the other hand, he has generated some income. And if we remember from the previous lecture, income increases capital and capital is an obligation towards the owner. So income increases obligation. So income is not a desirable effect. Income is an undesirable effect. So this time we need to credit the income account. In the previous lecture, I have mentioned that income is generated whenever the person sells something. But in this case, what did Mr. a. Cell? He actually sold services. He rented out a house, flat. So he rented out. So he sold some services. So he did indeed sell something and whatever he sold, the income has to be recognized. Now, what if Mr. a. Wrench touts his flat in areas so he does not receive the money immediately, but he will receive the money in the future. So it's just like a credit transaction. So he received he will receive the money in the future. So we will recognize the rent income by crediting the rent income account. And we have to recognize. The right to receive money in the future by a debit entry in his receivables account. Remember, when we have a right to receive money in the future, this is a desirable effect that we do have a right to receive. The right to receive is called receivables. So we will record a debit entry in the receivables account to denote that we have, we do have a right to receive the money in the future. So note that different words we use to denote the different types of effects, that different types of desirable effects and the different types of undesirable effects. Receivable is denoted is used to denote specific type of a desirable effect. Income is used to denote a specific type of an undesirable effect. Remember the words, remember these terms. These terms are specific terms used to denote specific effects. Whether they are desirable effects are the undesirable effects. Now later on, Mr. a. Receives that cash for his rent. His right to receive money goes down. So its receivables account is negatively impacted. So we need to credit his receivables account as he no more has any right to more money in the future. Although he has no right to receive any money in the future anymore, he should be happy that he has already received some money. So his cash account should be debited. He received some money already, so he should be happy. And this is his cash account as that has been desirably affected, his cash account should be debited. Now let's move on to the owner. What happens when the owner invest some money into the business? As we have mentioned earlier, that the owner is a separate entity from the business. So now that business will OH, that ONE our money back and obligation to pay money back to the owner has been created. And obligation towards the owner of the business is known as capital. This obligation should be recorded in the capital account with a credit entry. This the name of this obligation is capital. So the record should be done in the capital account with a credit entry. Remember, again that capital is a type of liability. But this is a special type of liability. Has this liability is o towards the owner of the entity, towards the owner of the business. And the specific name applies, which is capital. And the debit entry of course, goes to the cash account as the business has received cash, although the business has received cash from the owner of the business itself, still, the cash has to be recorded with a debit entry as the bank account of the business has increased, so that cash account should be debited. Now let's say Mr. a. Decides to withdraw some of the money he has invested in his business as cash has gone out. So cash account needs to be credited. Obviously. Note here that cash has been transferred to the owner of the entity. Although the cache has been just transferred to the owner of the business itself, is still we need to credit the cash account because we treat and the owner of the business as a separate entity in accounting, cash taken by the owner is an undesirable effect. So we credit the cash account, and at the same time we have to debit the drawings account. Cash taken back by the owner reduces the capital that he has invested in the business. A reduction in the capital means a reduction if the obligation, a reduction in the obligations of the business towards the owner. A reduction in capital means a reduction in the obligation. And this reduction in obligation needs to be recorded in the drawings account. Remember that we should we should use the drawings account to record this desirable effect of reduction in the obligation towards the owner of the business. 6. Conclusion: So in conclusion, I would like to say that I have shown you a very comprehensive way of dealing with debits and credits. This method can be effectively used by those from finance and non-finance backgrounds. Finally, let's look at the items learned once more. We learned that liabilities and capital are amounts owed. And we have learned that income increases one of these liabilities, namely capital. Therefore, income and profits, items that are undesirable in the same way that capital and liabilities are. So these items need to be recorded with credit entries. On the other hand, expenses and drawings reduce capital. So from the businesses perspective, expenses and draw rings are desirable items and should be recorded using debit entries. And that's all about debits and credits. And best of luck with your accounting studies.