Bravo, Adrien!
You weren't writing this message for me, but you happened to write the
explanation of "debit" and "credit" which I found very clear. I realise
that this won't be the ideal explanation for everyone, but it was for me.
Thank you for helping me understand. And thank you to everyone who has
taken the trouble to explain things on this -user list. You help more
-users than perhaps you will know.
Best regards,
—Jim DeLaHunt, long-time GnuCash user who is about to start using
"formal accounting labels"
On 2023-10-22 10:36, Adrien Monteleone wrote:
Edwin,
Debit/Credit is just Left/Right.
Maybe this will help...
The Accounting Equation:
Assets - Liabilities = Equity
(let's make all terms 'positive')
Assets = Liabilities + Equity
(now, we'll split off a subset of Equity)
Assets = Liabilities + Equity + Retained Earnings
(now, we'll substitute temporary accounts for Retained Earnings)
Assets = Liabilities + Equity + (Income - Expenses)
(now, we'll once again, make all terms 'positive')
Assets + Expenses = Liabilities + Equity + Income
And there, you have the full Accounting Equation with the five major
account types that GnuCash uses.
-----
In double-entry accounting, ALL transactions are in the form of:
Debit = Credit
Left = Right
The 'Debit' accounts (those that are normally (positive) a Debit
balance, and increase with a Debit, decrease with a Credit) are on the
left of the equation:
Assets
Expenses
The 'Credit' accounts (those that are normally (positive) a Credit
balance, and increase with a Credit, decrease with a Debit) are those
on the right of the equation:
Liabilities
Equity
Income
A negative balance in any account would indicate either an entry error
or a contra-balance situation. (rare for individuals)
-----
You can move funds from the left to the right, or vice versa, or
between any accounts or types on the same side of the equation. (I
will use the abbreviations Dr. and Cr. here)
Most texts will write transactions Debit first, then Credit as shown
below. The amounts are not shown, because they *must* be equal.
Example Left to Right - Asset to Liability (paying down a debt)
Dr. Liabilities:Loan
Cr. Assets:Cash
result: decreased Loan owed, decreased Cash on hand, Assets decreased,
Liabilities decreased - equation still in balance
Example Right to Left - Income to Asset (receipt of income)
Dr. Assets:Cash
Cr. Income:Salary
result: increased Cash on hand, increased Salary earned, Assets
increased, Income increased - equation still in balance
Example Left to Left(same type) - Asset to Asset (buying land outright)
Dr. Assets:Land
Cr. Assets:Cash
result: increased Land owned, decreased Cash on hand, Assets shifted -
equation still in balance
Example Left to Left(different type) - Asset to Expense (buying
groceries)
Dr. Expenses:Food
Cr. Assets:Cash
result: increased Food expense, decreased Cash on hand, Expenses
increased, Assets decreased - equation still in balance
Example Right to Right(same type) - Liability to Liability (paying
down a loan with a credit card)
Dr. Liabilities:Loan
Cr. Liabilities:Credit Card
result: decreased Loan owed, increased Credit Card owed, Liabilities
shifted - equation still in balance
Example Right to Right(different type) - Equity to Liability
(recognition of dividends to be paid - business transaction)
Dr. Equity:Retained Earnings
Cr. Liabilities:Dividends Payable
result: decreased Retained Earnings, increased Dividends owed to
shareholders, Equity decreased, Liability increased - equation remains
in balance.
*it is rare and unusualy for an individual to shift Equity to
Liabilities and vice versa. Forgiveness of Debt may in some
jurisdictions be a transfer from Liabilities to Income.
Regards,
Adrien
On 10/20/23 12:02 AM, Edwin Booth via gnucash-user wrote:
I need to wrap my head around the whole “debit/credit” concept.
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