hello everyone today we are focusing on one of the most fundamental concepts in accounting and that's the te account the principles of debits and credits understanding these tools is important crucial for recording and analyzing Financial transactions we will break down how tea accounts work how debits and credits flow through them and how they are so important for keeping the books balanced you cannot survive in an accounting course if you don't understand debits and credits simply put you will fail the course if you don't understand how debits and credits work I'm going to explain the concept and give you an aonic to remember to see how it works we will need this information for the next session and for all future session from journalizing to posting to to to the general ledger journalizing is one of the most important things that we do journalizing is recording that's what we do as accountant we record in order to record properly you have to understand debits and credits there a ke account you have to make sure you are familiar with that t account at the end of the session we will work a multiple choice questions from farat lectures. let's go ahead and get started before we proceed any further I have a public announcement about my company forat lectures. our financial accounting course is best for online students in students who are struggling in their financial accounting courses we cover all the essentials from debits and credits adjusting entries closing entries financial statements and all balance sheet accounts our comprehensive course include lectures multiple choice true false as well as practical exercises start your free trial today to help you pass your financial accounting course your success starts here so let's start by physically inspecting a t account a t account looks like a capital T notice here it's a t account and it has two side this say one side and this is the second side so it's shaped like a t account that's that's why it's called a t account it has a account title which is right here and this account title would take the place of an account like cash as an account what other accounts do we have supplies as an account and we talked about many accounts in the prior session accounts receivable is an account what else those are all assets liabilities accounts payable is an account unearned Revenue revenues is an account expenses so on and so forth so each account will have a t account or a general ledger for that matter it's a ledger account that's basically what it is and we're going to see that later it has a left side and the left side is called the debit side so on the exam if you are asked what does debit mean well the definition of debit is the left side physically the left side of the t account which is this side here it has a credit side abbreviated CR CR what's credit if you ask what what's the credit in an account it's the right side and remember what I mentioned in the introduction right don't forget about this debit means left credit means right that's the first thing you need to know now we need to know how does a t account functions well when we say we are debiting an account when I say I'm debiting this account it means I am inputting the number on the left side that's what debiting guess what's crediting crediting means I am inputting the number on the credit side if I'm debiting an account it means the number is being placed on the left side if I'm crediting an account it means on the right debiting and crediting does not meet does not means increase or decrease the terms debit or credit alone do not indicate an increase or a decrease again what's debit debit is left credit is right now then we have to figure out what's called the account balance and that's important the account balance is the difference between the debits and the credits so you might have 1,000 in debits 300 in credits the difference between them here is 700 and 700 is a debit balance why debit balance because we have more debits than credits well it could be the opposite it could be where we have have uh 1,000 in credits and 300 in debits here we have a balance of 700 credit what I'm trying to say is for any particular account you could have a debit balance or a credit balance now which account will have a credit balance which account will have a debit balance just wait a minute you're going to figure figure this all out so you're going to have a debit balance if the debits are greater than the credits and certain accounts would always have a debit balance and we're going to see that later and the opposite is true certain accounts would always have a credit balance which is which just hold on and you will see now you'll have a zero balance if your total debits equal to your total credits now although you have a zero balance for some accounts that zero balance you might have to put it on the debit or you might have to put the zero on the credit although it's zero but you're going to see certain account will have a debit balance certain account will have a credit balance and you're going to see C why in the next 2 minutes the other thing we need to know about t account is in accounting we have a double entry system what is a double entry system double entry system means simply put for the accountant equation to stay in balance at least two accounts are involved always and we talked about this when we analyzed a transaction at least two I didn't say only two at least two you could have three you could have four you could have 17 but you cannot have one account because if you have one account affected One account is changing the accountant equation will not stay IM balance because you need some increase and some decrease or to increase let's let's look at the accountant equation assets equal to liabilities plus owner's equiry so some possible combination of things let me go back here some possible combination of things we can increase asset and reduce asset the accounting equation will stay IM balance so notice we could increase but we need two accounts we can increase assets and increase liability the accountant equation will stay imbalance we could reduce liabilities and reduce assets we can increase a liability and reduce a liability this could happen we can increase equity and increase asset we can increase asset uh there's possible combination we can reduce asset and reduce equiry the point is you have to have at least two accounts are affected and this is why I I have here account one and account two at least two accounts now if we only have two accounts if one is debited being debited the other one has to be credited why because each transaction total debits equal to Total credits you have two accounts one it's going to be debit if it's two one will be a debit one will be a credit now you could have three two debits and one credits but the amount is is equal to each other the two debits when you add them up they equal to the one credit so the total debits equal to Total credits you could have more than two accounts now for your purposes in financial accounting most of the time unless we have a compound entry you're going to have two accounts and that's why I told you if you know cash is involved start with cash you figure out most of your problem so so far so good now we have not talked about when do we debit to increase an account when do we credit to increase in account so on and so forth so now this is the most important part of this lecture how T accounts increase notice I did not say decrease because if you know how they increase you know how they decrease it's the other side so I'm going to start with three accounts that they work the same way notice all assets all expenses all dividend all assets what are assets cash prepaid accounts receivable land supplies inventory all assets they increase by debting them they increase by debit in them now do I have to mention that to decrease them you credit them no just if they increase on the debit well I don't have to tell you on which side they gets reduced right because come on you should know this right the opposite side okay so assets when I'm debiting an asset when I say I'm debiting an asset it means I am increasing an asset expenses when I'm when I say I'm going to debit an expense it means I'm increasing an expense I'm going to make it easy for you for expenses for now for now you don't credit expenses are we going to credit expenses yes there's one particular reason we're going to have to credit expenses but I made it I'm going to make it easy for you if you know expenses involved debit expense unless something else is happening and if that something else is happening I will you would know about that I'm not going to mention it now you will see it later dividend the same thing in dividend dividend always increase we don't reduce dividend are we going to reduce dividend yes when you will know when we get to it otherwise for now assets could go up assets could go down expenses always go up dividend always go up and they go up let me put this on the debit side I don't want to confuse anyone they go up on the debit side they go up on the debit side now here's what I need to tell you the side that the account increases on the side that the account increases on which is assets expenses and dividend the debit side is also called the normal side so always always always for assets we should have debits greater than credits so we always have a remember I told you I'm going to tell you when we're going to have a debit balance and a credit balance and this is give me one second let me go back one more time okay so debits are greater than credits for assets expenses and dividend and as a result we're going to have a normal balance of debit now how about if debits equal to credits you still put the zero under the side that the account increases on so what's the normal balance of an account the normal balance of an account is the side that this account increases on which is the happens to be the debit now this is confusing now I'm going to tell you why those account work the same way what's what's common between asset expenses and dividend but even if you don't know what these accounts why these accounts work the same way here's what I want you to remember this is how you would remember this actually how would you remember this you would say I have three accounts and those are dividend dividend notice here dividend let me just my screen acting up give me one second please dividend expenses and assets what what about dividend expenses and asset d e and a those accounts work the same way what does the EA stand for drug enforcement uh you can see Administration or agency I don't care if you like narcos DEA DEA accounts if if you have a DA account and you want to increase it you will debit okay notice to make it easier D for debit D for dividend dividend expenses and asset work the same way now what's left because we have six types of accounts what's left are liabilities revenues and common stock and guess what they work the opposite way if you want to increase liabilities you credit liabilities if you want to increase revenues you credit revenues and matter of fact we don't reduce revenues liabilities if you want to decrease them I don't have to tell you you decrease them on the debit side it just as long as you know the side that it increases on you should know the other side common stock the increase on the credit and I'm going I'm not GNA I'm going to tell you you are not going to reduce common stock are you yes you will at some point when the company go out of business but you you don't have to deal with this with Revenue gets reduced yes when we'll talk about about that later so the other way you can do it is take lrc and make an acronym and say those accounts they increase on the credit any way you want to I the way I the way I learned it DEA debit increase I'm good to go and thank you narcos I like that show so if you haven't watched it on Netflix give it a chance so those how T accounts work let me show you the T accounts in form of the account and equation assets equal to liabilities plus equity and this is another picture of the same thing now remember revenues and expenses turns into retained earnings retained earnings is an aquary account so every time we hear the word aquary if we want to kind of make an equity account Equity account Equity increase on the credit and gets reduced on the debit so common stock and revenues they are they increase equiry while dividend and expenses they reduce equiry and retained earning we hope that we have more revenues and expenses it should be a credit so the normal balance for retained earnings is a credit could you have a debit absolutely if you have more expenses than revenues over the years you will have a debit what I just taught you right now is the fundamental pieces that you will need debits and credits for this course so it's very important if you want to go back and view it and the most important SL slide in my opinion is this slide here you want practice practice practice until you get comfortable first you know your accounts what type of account do I have and what how do I increase an account or reduce an account don't assume anything just work through this if you want to print the slide or make a note of it tattoo it on your hand I really don't care how you do it just make sure you remember this until you get comfortable and this becomes a second nature to you if you're an accounting major or it should now if you would work and accounting this is even a third nature right but as a students you need to be familiar with this DEA will help so this is a good cheat sheet daa dividend expenses and asset they increase on the debit that's all what I have to know and I will know the rest of my debits and credits let's take a look at this multiple choice question from farat lectures. which of the following correctly describe the normal balance of accounts receivable account hold on a second first I need to know what type of account is accounts receivable to know the normal balance you want to know the type of account why because once you know the type you know on which side does it increase once you know on which side does it increase you know whether it's a normal balance debit or credit well accounts receivable the type of the account is an asset and if we have an asset on which side does it increase on the debit therefore the normal side is debit well the answer is the normal side is the debit side because this is the side that assets increase on and accounts receivable is an asset so it's a debit so hold on I'm I'm going to quiz you on this one so I want you to think about this when as account receivable goes up and if we have two accounts are involved can you know what other account will go up and the answer is sales revenue or revenues because when you increase accountable it means you are saying I performed the service for someone and as a result I generated my revenues sales revenues Consulting revenues some sort let me be more specific it may not be sales it could be some sort of a revenue let me put revenues instead a generic term revenues my revenues will go up because if I'm increasing account receivable I'm increasing my revenues that's the reason I'm increasing my account receivable the definition of account receivable is performing work on credit what should you do now go to Farhat lectures. work additional mcqs look at additional lectures that's going to do what that's going to help you in your financial accounting course in your accounting courses invest in yourself accounting is worth it and good luck