Money
Flows

Helping a Million People in each Country of the world to understand the basic principle of accounting.

Account for where money CAME FROM and where it WENT.

1) What is Credit & Debit?

Credit and Debit

Credit & Debit:

In accounting we spell "Come From" as Credit and "Go To" as Debit. We Credit where the money came from and we Debit the place where it has gone to.

In the image above (underneath the pipe) is the classic shape of a T-account. On the right hand side of the T, we find the Credit side. All the money leaving this place (or account) is written on the Right Hand Side.

On the Left Hand Side of the T, we find the Debit side. All the money that comes into a place (account) is written on the Left Hand Side.

"Double Entry"

Whenever you see an amount on the Left Hand Side (Debit side), you know it had to come from somewhere. You should find the corresponding amount on the Right Hand Side (Credit Side) of another place (or account).

So this is what we mean by "double entry" . You can't just say that money arrived somewhere - without also explaining (accounting for) where it came from. Think of the pipe. The water comes from the dam and goes to the bath. And then it comes from the bath and it goes to the drain.

an Account is a "place"

An account is just a place where we keep record of what has come in and what has gone out. The dam, bath and drain are examples of "accounts".

Something always goes out on the right and comes in on the left. We credit where it came from and we debit where it went. This is how we keep history of all the "ins" and "outs".

At the end of a year we add all the "outs" (credits) together and all the "ins" (debits). We can then compare the total on each side and see which one is greater.

It works like this:

80 Liter water flows from the Dam to the Bath. 80 Liter is

After bathing we empty the bath. 80 Liter is

You will see that the bath is empty but we kept record of the history of the transaction (because the dates are part of the transaction).

Transactions

You will see that the Dam and the Drain are outside of the House. These are external accounts. The Bath is inside the House. This is an internal account.

In the Bathing account we have a record of exactly when (and how much) water flowed in, as well as when (and how much) water flowed out of the Bath. This is almost like a Bank Account.

Secret:

The secret to NOT getting confused is: NEVER talk in terms of "increase or decrease" and also not "plus or minus" but ALWAYS "came from" and "went to".

This was Concept 1.
If you are curious to learn even more, go to: >>> Concept 22:
3-Ways-IN & 3-Ways-OUT

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(0)
Come From
&GoTo
(1)
Credit
&Debit
(2)
3 ways IN
& 3 OUT
(3)
Statements
A = E + L
(4)
Trading
&VAT
(5)
Downloads
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