For years, I’ve been working with people in accounting and bookkeeping jobs who are really, really good at what they do. But when they have to deal with Debits and Credits, they seize up and go blank. Although these people are highly knowledgeable about their business (or the business at which they work), the basic backbone of accounting has remained a mystery to them.
And it was a mystery to me also. When I started working with accounting software, I interviewed for a job in tech support. My pitch was, “I don’t know anything, but I want to learn”. A very kindly person hired me, and it became clear within a week that I really didn’t know anything. This was highly embarrassing.
So I resolved to at least learn accounting, and the software knowledge would have to come through osmosis. I spent long hours every night reading accounting texts, downloading accounting tutorials and studying them, asking questions in forums, but I still couldn’t understand the basis of accounting: what are Debits and Credit? How do they work? Why?
All of the books, tutorials and forums seemed to use a lot of words to not explain what I needed to know. So I decided to experiment. In a test company database, I made entries of all types. Then I read the General Ledger. And I ran reports, lots and lots of reports. Slowly it dawned on me. In certain accounts, Debits made the account balance go up (plus). But in other accounts, Debits made the account balance go down (minus). And amazingly enough, in the same accounts where Debits were a plus, Credits were a minus (and where Debits were a minus, Credits were a plus).
Part of the problem was that I had a concept stuck in my head: a Credit was a plus, and a Debit was a minus. That’s how it works in my checkbook, right? But in the tests I ran, sometimes a Debit was a plus. Weird, huh?
It looked like checking accounts and savings accounts (and other Asset accounts, I realized later) contained entries where Debits were a plus. Oddly enough, expense accounts (Office Supplies, Rent, Cell Phone) also worked this way.
Other accounts (Auto Loans, Interest Income, Equity) were the opposite. Credit were a plus and Debits were a minus. This was true every time, no matter what I thought should happen.
The only way I could deal with this seemingly contradictory knowledge was to draw a picture.
In this diagram, the account numbers are arbitrary, and they are not really important. What is important is that Liability, Equity and Income accounts act like your checkbook in terms of Debits and Credits. Asset and Expense accounts act the opposite of your checkbook in terms of Debits and Credits.
In the course of discovering this, I’m sure I read 10,000-20,000 words, trying to understand this simple diagram. Now you know it in less than 500 words. It always works. Later on, I asked “why”, and had to read the history of accounting, but that’s not necessary now. Just memorize the above, or click on the diagram and print it for yourself. You’ve earned it.
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