A while back, I came across a story about Debit and Credit. I can’t remember exactly where I read it, but it stuck with me because it’s both funny and insightful sprinkled with a bit of accounting humor. I thought it was too good not to share. Hope you enjoy it!
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“Once upon a time, there was a young accountant, fresh-faced and eager, who joined a firm to fill the shoes of a retiring legend. This senior accountant had dedicated his entire career to the company—a lifetime of precision, wisdom, and quiet rituals.
The junior accountant quickly noticed something curious about his predecessor. Every morning, the older man would open his desk drawer, pull out a small, well-worn flashcard, read it with unwavering focus, and then tuck it back into its place. The habit had an almost sacred air, like a personal mantra or a secret key to his success.
Intrigued, the junior accountant watched from afar, imagining what profound wisdom the flashcard must hold. Was it a motivational quote? A guiding principle that anchored his day? Whatever it was, it had to be the secret to decades of excellence. The young man couldn’t wait to uncover its mystery.
Two weeks later, the day finally came. The retiring accountant packed up his belongings, shook hands with his colleagues for the last time, and walked out of the office, leaving behind the desk and its secrets to the junior accountant.
Excitedly, the young man took his place, the desk now his domain. Heart pounding with anticipation, he pulled open the drawer and reached for the legendary flashcard. This was it, the moment he’d been waiting for. He unfolded it with reverence, ready to inherit the wisdom of a lifetime.
And there it was, scribbled in neat, practical handwriting:
“Left Drawer = Debit, Right Drawer = Credit.”
Understanding Debits and Credits in Double-Entry Bookkeeping
Accounting is built on the foundation of the double-entry bookkeeping system, which ensures that every financial transaction remains balanced. Each transaction affects at least two accounts, one as a debit (Dr) and the other as a credit (Cr), keeping the accounting equation intact: Assets=Liabilities+Equity
How Debits and Credits Work
Debits and credits impact different types of accounts as follows:
- Assets (e.g., Cash, Accounts Receivable, Equipment)
- Increase → Debit (Dr)
- Decrease → Credit (Cr)
- Normal balance: Debit
- Liabilities (e.g., Accounts Payable, Loans Payable)
- Increase → Credit (Cr)
- Decrease → Debit (Dr)
- Normal balance: Credit
- Equity (e.g., Common Stock, Retained Earnings)
- Increase → Credit (Cr)
- Decrease → Debit (Dr)
- Normal balance: Credit
- Revenue (e.g., Sales, Service Income)
- Increase → Credit (Cr)
- Decrease → Debit (Dr)
- Normal balance: Credit
- Expenses (e.g., Rent, Salaries, Office Supplies)
- Increase → Debit (Dr)
- Decrease → Credit (Cr)
- Normal balance: Debit
Real-World Examples
Let’s apply this to common business transactions:
- Purchasing Office Supplies on Credit ($500)
- Record the bill:
- Dr. Office Supplies $500
- Cr. Accounts Payable $500
- Paying the bill:
- Dr. Accounts Payable $500
- Cr. Cash $500
- Final impact: Dr. Office Supplies, Cr. Cash
- Record the bill:
- Taking Out a Loan ($300,000)
- Dr. Cash $300,000
- Cr. Loan Payable $300,000
- Billing a Client for Services Rendered ($4,000)
- Dr. Accounts Receivable $4,000
- Cr. Revenue $4,000
- Receiving Customer Payment ($4,000)
- Dr. Cash $4,000
- Cr. Accounts Receivable $4,000
Debits and credits always balance each other out, ensuring the financial statements remain accurate. This fundamental principle keeps your books in order and allows businesses to track their financial health with confidence!