 Hello and welcome to the session. This is Professor Farhad and this session will be looking at the famous debits and credits. It's that concept that gives students some headaches. This topic is typically covered in a financial introductory accounting course and obviously you would need to know this if you are setting for the CPA exam. Now as always I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. For example, this lecture goes under financial accounting which I already have over 150 lectures but I do cover other accounting courses. Now if you like my lectures, please like them, hit the like button. It helps me tremendously. Share them with your classmates, with your friends and please connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources if you are studying for your accounting courses or you are studying for your CPA exam. Especially if you are studying for your CPA exam, you'll have true, false, multiple choice practice exercises and 2,000 plus practice CPA questions. If you are studying for your CPA exam or you are an accounting student that are looking for additional resource, please consider visiting the website. So let's take a look at debits and credits which is what we're gonna be talking about is first something called the T account. So the T account comes with debits and credits. What is the T account? It looks like a capital D which we're gonna see in a moment. It represent basically a ledger account and is used to show the effect of one or more transaction. So where's the debits and credits come from? Where's the idea comes from? It comes from this T account. Why is it called the T account? Because it looks like a capital T and this T account has two sides. One, we call it the debit side and one, we call it the credit side. Now the first confusion that student experience when they're learning about debits and credits, they think about debit card and credit card. So let me just clarify this and get this out of the way. Here's a debit card and here's a credit card. They have nothing to do with the debits and credits that we're gonna be talking about today. I'll tell you the story. When I started teaching accounting which I still teach accounting, when I have expired credit cards and debit cards, I bring them to class and I bring a scissor and I cut them in front of my students to remember that what we are talking about today has nothing to do with debit card and credit card. So I'm accent them out. So this way you forget about this. So let's go back to what we need to know. So what is a debit and what is a credit? So if I ask you on the exam, what is a debit and what is a credit from a T account perspective, debit means left. So the right answer is the left side. That's all what debit is, period. Credit means right side of the T account. That's all what it means. Debit means left, credit means right. That's all what it means. Now through debits and credits, we're gonna keep track of the various accounts. Now how do we keep track of the various accounts? Now remember that we have six different categories of accounts. We have assets and we learn about those in the prior session. Liabilities, if you don't know what these are or the accounts that comes underneath them, under these categories, you wanna make sure you wanna go through the prior session and we have a third category called equity. Now under equity we have the expanded equity equation. We have common stock, dividend, revenue and expenses for different categories, okay? So those are the basic categories. Now what you need to know is this. Each account will have a debit side and a credit side, a debit and a credit, so on and so forth. So each of these accounts, so under cash we could have many cash accounts. We could have assets, we could have many accounts, cash, land, account receivable, supplies, property, plant, equipment, so on and so forth. Under liabilities we could have accounts payable, notes payable, so on and so forth, okay? Common stock usually it's one account, dividend usually one account, revenues we could have more than one account and expenses we have many accounts. But it doesn't matter. We're gonna learn about the debit and credit that applies to each category of accounts. Starting with assets. Here's what you need to know. Assets, the increase on the debit side. Notice the plus sign is on the debit side. So you need to memorize that assets increase on the debit side. Well, if they increase on the debit side, it means they decrease on the credit side. So if you know it's an asset, you know it's going up, we're gonna increase the asset. Liabilities, they increase on the credit side. Well, if they increase on the credit side, they reduce on the debit side. Common stock, they increase on the credit side. If they increase on the credit side, means they get reduced on the debit side. And for the financial accounting students, if you are just starting accounting, just cross out the debit side under common stock. What does that mean? I'm going to tell you right now, common stock don't go down, although it might go down in the real world when the company closes, but generally speaking, you don't debit common stock. Common stock always go up. Dividend, it increase on the debit side, it reduce on the credit side. Also, if you want to for now, if you are starting accounting students, we don't credit dividend, although we are going down the road, but normally we don't. Only under special circumstances, we credit dividend. Therefore, if it's a dividend, you know, you know, dividend is involved, think about a debit revenue. It increase on the credit side. Obviously, it reduced on the debit side. Also, what I want you to notice, what I want you to note is revenue don't go down, just for now. It's going to go down eventually at some point at the end of the accounting period, but don't worry for now. As you are starting to learn about debits and credits, revenues don't go down for now. Expenses, they go up on the debit side. Also, for the sake of simplicity for now, expenses don't go down. So we don't credit expenses. Do we ever credit expenses? Possible. Yes, we might and we will at the end of the accounting period though, but normally we don't credit expenses. So notice what I just did. Under the equity, notice those are the four equity account, they're kind of one directional. They all go up and they don't go down. Now, would they go down? Sure they will. Everything goes down, but for our purposes, think of them. They always go up for now until you learn them, then you will eventually learn about something called the closing process and during the closing process we reduce them down. But for now, they don't go down to make your life easy for now. Okay. Now, so what do you need to do about these debits and credits? Well, you need to memorize them. Well, you might be saying, hold on a second. So just how do I memorize this? Well, here's, I'm going to give you an amonic, help you to memorize this. I want you to notice that assets, dividend and expenses, notice they all increase on the debit side. So this is how I learned it. I said D for dividend, D for dividend, E for expenses and A for assets, DEA, Drug Enforcement Administration. These account, they go up on the debit side and to make it easy, D for debit. So all we need to memorize is this. If it's a DEA, Drug Enforcement Administration Account, Dividend, Assets and Expenses, these account increase on the debit side. So if they are not DEA, they increase on the credit. So ask yourself, is this a DEA account? Is this account an asset? An expense or dividend? And is it going up? If it's going up and it's one of these accounts, I'm going to debit that account. So this is a way to memorize this amonic. Okay, DEA. Now, you might be saying, why do assets, dividend and expenses work a certain way? Then, liabilities, common stock and revenues increase on the credit. That's a normal question. Why? That's the case. Now, I'm going to tell you why. You may or may not understand why for now. You don't have to understand why. You just have to know why for now. The reason is this. Revenues, common stock and liabilities, they kind of work the same way. Assets, dividend and expenses, they also work the same way. And that's why the debits and credits are that way. Okay? What does that mean? Well, here's what it means. When we generate revenue, we increase assets. When the company generates revenue, when we incur revenue, assets go up. When we contribute money to the company, when we contribute common stock, when we contribute to common stock, asset goes up. When we incur reliability, also asset goes up. So, when we borrow money, asset goes up. Now, we could also incur liability for an expense, but if we incur liability for an expense, we're not using up assets, kind of we're conserving assets. Let's take a look at dividend, expenses and assets. When dividend goes up, asset goes down, because when we pay dividend, we pay dividend out of cash. When we eventually settle expenses, when expenses go up, asset goes down. And specifically, eventually, how do we settle our expenses? We pay cash. How do we settle our dividend? Most likely cash. And when we acquire more assets, when we acquire more assets, cash goes down. Eventually, we either bought the asset with cash or bought it on account. So, that's why they work the same way. But anyhow, as I told you a second ago, you don't have to worry about why they work the same way for now. As a financial accounting student, you just need to know that dividend, expenses and assets, they increase on the debit side. Now, you need to know one more thing about these accounts. And that's important for your understanding of how the T-accounts work. We have something called the normal side of an account. Assets, they will have the normal side of debit. Liabilities will have a normal side of credit. Common stock will have a normal side of credit. Dividend will have a normal side of credit. I'm sorry, debit. Revenues will have a normal side of credit. And expenses will have a normal side of credit. And hopefully, you notice one thing, that the normal side is the increase side. What does that mean? It's the side that the account increases on is also called the normal side. Also called the normal side or the normal balance. What does that mean? It means when we run the balance, for all assets, they would have a normal balance of a debit. In other words, we'll have more debits than credits. Even if we have zero, we'll put the zero on the debit. Liabilities, when we run our liabilities balance, at the end of the day, the normal balance will be credit. Because we're going to have more credits than debits. And even if we have zero as a balance, we put it on the credit. Same thing with common stock, dividend, revenues, and expenses. Those are the normal balances. So you need to know what's the normal balance. And it's easy. If you remember DEA, increase on the debit, DEA will have a normal balance of debit. Where liabilities come in stock and revenues, the other accounts, the increase on the credit, they have a normal balance of credit. That's something you need to know. And you'll see why later on it's going to make your life much, much easier. Now let's take a look at an account just to see how a DEA account would look like. So for the sake of illustration, we're going to have the cash account. Remember, the cash account goes up on the debit, goes down on the credit. So let's take a look at this. Let's assume we have a debit of 30,000, 4,200 and 1,900. So we invested money in the business. We earned revenue and we collected some money. It doesn't matter. Cash went up. We add up all the debits. We add up all the debits and they add up to 36,100, which is this number here. What we do now, we add up all the credit. We add up all the credits and they will add up to 31,300. So cash increase by 36,100, the cash balance and the cash balance went down by 31,100. We purchased supplies, purchased equipment, paid rent, paid salaries, so on and so forth. Now, the difference between the increases and the decreases is called the balance of the account. Give me one second, please. So let me just, this one was, let me just fix this. So the difference between the debits, 36,100 and the credits, 31,300. The difference between them, what's left? So if we received 36,100 of cash, we paid 31,100 in cash, the remaining cash balance is 4,800. Notice the balance is a normal debit balance. We put the balance on the debit side. So this is how we analyze a T account. We have a debit side. For cash, it's going to go up. We have a credit side. The cash will go down. The difference, so I deposited 30,000, 4,200, 1,900. I withdrew all these amounts. Well, guess how much cash do I have? I'll take the difference between them and I'll put the difference as a debit because cash is an asset and the normal balance is a debit balance. Now, everything that I told you is very important for the next session. In the next session, you would learn how to journalize and post to the ledger. So when I start to journalize and post to the ledger, I'm going to come back up here and say, you need to know how debits and credits work. Now, if you're studying for your CPA exam, which I highly doubted, and if you are for this at this level, that's a good idea. Learn your basics. If you're an accounting student, I strongly suggest you learn this by heart because this is critical for your success. If you want additional practice, resources about this topic, go to my website, invest in your career, invest in your education. Accounting is worth it. Study hard and good luck.