Accounting CR vs DR

[Driller]

Can anyone help me with this, it’s driving me mad.

I’ve always hated accounting and am trying to get my head around this concept.

This article apparently explains it but it makes no sense to me:

https://www.investopedia.com/ask/answers/04/072304...

How can a credit be an “increase in liabilities”? and a debit a decrease in liabilities? Surely a liability is something that draws on your resources rather than adding to them?

[2 GKC]

You just have to accept it. An increase in cash is a debit entry, which is somewhat counter intuitive. Someone told me it shows as a credit on your bank statement because it’s from the bank point of view, ie a liability to them. A debit is an expense, asset or dividend and a credit is income or liability.

[Kirkmoly]

^ This.

OP, just remember the language is Latin/Italian. Think of your Debtors for example (obviously an asset) and your Creditors (obviously a liability) and how close those names are to Debit and Credit.

[Driller]

Well thanks for the replies, but “you just have to accept it” is my problem. It drives me mad

[Countdown]

You have two main financial statements - a P&L and a Balance Sheet. A P&L has two main categories (Income and Expenditure). A Balance Sheet has two main categories (Assets and Liabilities).

1. Income (e.g. sales revenue)
2. Expenditure (eg rent, salaries, utilities)
3. Assets. (Buildings, Stock, Cash)
4 Liabilities (Creditors)

A debit (DR) to any one of those 4 categories must result in a credit (CR) to any of those 4 categories. For example

You buy a car for £10,000. The accounting entry is

DR Fixed assets £10,000 (you are increasing your fixed assets by £10k)

CR Cash (you are reducing your cash by £10k)

OR

CR Creditors by £10k (You are increasing your liabilities by £10k)

A debit INCREASES the value of an asset but DECREASES the value of a liability.
A credit DECREASES the value of a liability but INCREASES the value of a liability

[Driller]

Countdown said:

You have two main financial statements - a P&L and a Balance Sheet. A P&L has two main categories (Income and Expenditure). A Balance Sheet has two main categories (Assets and Liabilities).

1. Income (e.g. sales revenue)
2. Expenditure (eg rent, salaries, utilities)
3. Assets. (Buildings, Stock, Cash)
4 Liabilities (Creditors)

A debit (DR) to any one of those 4 categories must result in a credit (CR) to any of those 4 categories. For example

You buy a car for £10,000. The accounting entry is

DR Fixed assets £10,000 (you are increasing your fixed assets by £10k)

CR Cash (you are reducing your cash by £10k)

OR

CR Creditors by £10k (You are increasing your liabilities by £10k)

A debit INCREASES the value of an asset but DECREASES the value of a liability.
A credit DECREASES the value of a liability but INCREASES the value of a liability

Aaaaahhhggggg, you sadist, you just just melted my brain!

You guys clearly know your stuff, as they say in French “chaque un son métier”.

My rebel mind still refuses to accept it though.

[Doofus]

Double Entry bookkeeping.

A sale is shown as a credit in your Profit and Loss account, but because every entry needs an opposite and equal entry, the other side of the sale is recorded as a debit in your balance sheet (let's say it goes in the bank).

So your P&L should ideally have more credits than debits (more income than expenditure), and a healthy Balance Sheet should be the other way around (more debits - assets, than credits - liabilities).

Let's not get into the fact that the balance sheet always equals zero. That's for next week's lesson.

Gain (credit) to the P&L = debit to the Balance Sheet
Loss (debit) to the P&L = credit to the Balamce Sheet

[Eric Mc]

Driller said:

Well thanks for the replies, but “you just have to accept it” is my problem. It drives me mad

I equate it to Port and Starboard in sailing or flying. If you are an airman or sailor you just have to accept which side of the vessel is designated port and which is starboard. It is a superior system to just saying "left and right" because left and right can be misconstrued.

The terms "debit and credit" perform the same function in accounting. Because they are fixed and accepted, there SHOULD be no confusion. Imagine if accountants were using the terms "plus or minus" or "in and out". It would be far too easy to mix up what they were trying to describe.

[Driller]

Eric Mc said:

Driller said:

Well thanks for the replies, but “you just have to accept it” is my problem. It drives me mad

I equate it to Port and Starboard in sailing or flying. If you are an airman or sailor you just have to accept which side of the vessel is designated port and which is starboard. It is a superior system to just saying "left and right" because left and right can be misconstrued.

The terms "debit and credit" perform the same function in accounting. Because they are fixed and accepted, there SHOULD be no confusion. Imagine if accountants were using the terms "plus or minus" or "in and out". It would be far too easy to mix up what they were trying to describe.

Thanks Eric, that actually helps a lot. I’ll go back and reread the thread with that in mind.

[Kirkmoly]

Driller said:

Thanks Eric, that actually helps a lot. I’ll go back and reread the thread with that in mind.

When you’ve done that you should be able to explain why profit is a liability (credit balance).

[MaxFromage]

This is generally how we decide if a trainee is going to make it. If they still can't get their head round debits and credits and control accounts after 6-12 months, they never will. And they are recommended a different career

Some think it's not so important these days with trial balances produced by software such as Xero, but they couldn't be more wrong. It's arguably more important, to be able to spot the errors.

[Stuart70]

Countdown said:

A credit DECREASES the value of a liability but INCREASES the value of a liability

So close to the end and so much useful stuff and then you cocked it up! Ah well… too many liabilities!

[Countdown]

Stuart70 said:

Countdown said:

A credit DECREASES the value of a liability but INCREASES the value of a liability

So close to the end and so much useful stuff and then you cocked it up! Ah well…

Damn and blast it was a typo

A credit DECREASES the value of an ASSET but INCREASES the value of a liability

[Doofus]

Countdown said:

Damn and blast it was a typo

A credit DECREASES the value of an ASSET but INCREASES the value of a liability

A depreciation charge doesn't increase a liability. Neither does a payment out of the bank.

[omniflow]

This may have already been said, but when I did a finance module as part of my (never completed) Computer Science degree course, the one thing I took away from it regarding double entry book-keeping was:

"You write everything down twice and end up with nothing"

[Countdown]

Doofus said:

Countdown said:

Damn and blast it was a typo

A credit DECREASES the value of an ASSET but INCREASES the value of a liability

A depreciation charge doesn't increase a liability. Neither does a payment out of the bank.

I was meaning either/or (depending on whether it was an asset being credited or a liability)

A depreciation charge DECREASES the value of an ASSET (specially fixed assets)

A payment out of the bank DECREASES the value of an ASSET (specifically cash)

The opposite entries can be either to the P&L (in case of depreciation) or to another category on the BS (in the case of a cash payment)

[Eric Mc]

MaxFromage said:

This is generally how we decide if a trainee is going to make it. If they still can't get their head round debits and credits and control accounts after 6-12 months, they never will. And they are recommended a different career

Some think it's not so important these days with trial balances produced by software such as Xero, but they couldn't be more wrong. It's arguably more important, to be able to spot the errors.

100% in agreement. Because the software does most of the debiting and crediting, it actually makes it harder for trainees to get their heads around the principles. Most non-accounting type people can manage large parts of these auotmated double entry book-keeping systems i.e. they can handle the posting of sales and purchase invoices or bankings and bank payments. In these types of entries, the person entering the data just makes one entry and the system automatically handles the debiting and the crediting of the relevant nominal ledger accounts.

However, the need to fully understand accounting principles, including the logic of debits and credits, manifests itself when the person entering the data has to make both the debit and the credit entries. To do that, they need to fully understand what they are trying to achieve with the posting.

This is why I am so worried about MTD. I cannot see how an ordinary person without a fundamental knowledge of the logic behind debits and credits can hope to make certain types of entries.

For example, the entering of the acquisition of a fixed asset which has been funded by a hire purchase agreement - or a finance lease. God knows what type of entries we will see.

[Tagteam]

I’m an accountant and had to explain this to my brother who studied accounting as part of an engineering degree. Also long as you accept cash is a debit balance , everything else makes sense. If you keep thinking being in credit in a bank is a credit balance . You’ll never get there

[MaxFromage]

Eric Mc said:

This is why I am so worried about MTD. I cannot see how an ordinary person without a fundamental knowledge of the logic behind debits and credits can hope to make certain types of entries.

For example, the entering of the acquisition of a fixed asset which has been funded by a hire purchase agreement - or a finance lease. God knows what type of entries we will see.

HMRC told us tax needn't be taxing. It'll be fine a car crash.

[Eric Mc]

One of the fundamental tenets of UK taxation is that, in general, there is an assumption that business accounts are prepared in accordance with generally accepted accounting principles and practice i.e. which, of course, assumes a sound knowledge of debits and credits.

If compliance with the quarterly requirement to submit MTD data causes data to be generated which does not comply with these principles, then, essentially, HMRC will be getting massive amounts of junk data every three months.

To what use can they put this data?