The double entry for purchasing raw materials would be the other way round: Dr Materials; Cr Cash.
Cash is an asset so debiting it would increase your cash balance. Likewise, Materials is an expense code in the P&L and debiting it will show it as a cost. You would only credit to the P&L for income transactions.
Yeah, kind of a bad way to begin a primer on financial statements... with a novice mistake. My accounting professor used the acronym DEAD: Debits increase Expenses, Assets, and Dividends.
I use Gnucash that automatically translates accounting terms to more user-friendly ones depending on the account type (e.g. becomes Deposit/Withdrawal for current accounts, Expense/Rebate for expenses accounts, etc).
(author here) Thanks for raising this — I intended for that example just to illustrate the underlying concept of having balanced entries for a transaction, rather than to show how double entry is practiced today.
The focus of the post is on the underlying concepts rather than the implementation details — I didn't want to introduce the whole thing about debiting assets vs debiting expenses etc because it's a little confusing for a lay person.
Hope that makes sense. I've added a caption to the image explaining this.
I don't think this is a useful response. The concept of accounting is deeply integrated with the rules of accounting. The implementation details are the concepts, really. I'd suggest making the examples conform to the actuality of how accounting will get used.
I agree. Basic pedagogy: if you are about to introduce an example where you think you might have to choose between being truthful or confusing, you should not introduce that example. Or, if you have to, do it the confusing way.
Lying to beginners to shield them from confusion does not help them. Find a way to do what you want to do while still telling the truth.
I have to echo others' sentiments, too. You should use examples that are harmonious to both the concept and implementation detail. Otherwise you're just creating the potential for confusion for no good end.
Great article. Most people don't appreciate the value of accounting knowledge. One quibble: few businesses are actual corporations, so I learned to use the term "Owners' Equity" instead of "Shareholders' Equity".
the article says a debit is a loss and a credit is a gain. if you pay for cotton, you've "debited" your cash amount... your cash balance would decrease.
but now you say cash is an asset. ok. so? why does saying that now mean that "debiting" cash increases the cash balance? you certainly don't have more cash on hand... you have less.
I still subscribe to the definition of the words "debit" and "credit" that I learned in my 100-level accounting class: A debit is an entry in the left column of the journal, a credit is an entry in the right column. The meanings "gain" and "loss" only related to debit and credit when you're talking about the "normal balance" of a specific type of an account (an example: a debit to a revenue account represents realized revenue). Without the context of a specific type of account the words debit and credit only refer to the placement of the transaction in a journal.
The double entry for the cash account in your books is the opposite terminology used by the bank to present your transactions. For example, in your statement you would see cash coming in as a credit and a payment as a debit. This is because the bank is showing the debits and credits from their point of view - you have money held in the bank that they are obliged to give you when you request a withdrawal.
Every accounting entry has one side posted to the P&L and the other to the Balance Sheet (unless you're reclassifying between accounts but that's for another time). In the P&L a debit entry indicates a cost to you, and a credit indicates income earned. In the balance sheet, a debit will increase an asset or decrease a liability, vice versa for a credit.
To record a purchase in your books you have to post one side to the P&L and the other to the balance sheet. Because of the rules mentioned above you debit an expense, and because you need to balance out the entry, you post the credit to cash, which conveniently decreases your cash account asset.
It's confusing at first but easier when you understand and accept the mnemonic DEADCLIC.
The lengths to which economists go to avoid negative numbers! Is there any good reason to not use the same sign for all accounts and just flip the sign of the amounts in the transaction instead?
Many ERP systems do use the convention that debits are positive numbers and credits negative and so only have a single column for amount. This is possibly more confusing for non accountants as they have to understand that a negative income balance means they made money.
Cash is an asset so debiting it would increase your cash balance. Likewise, Materials is an expense code in the P&L and debiting it will show it as a cost. You would only credit to the P&L for income transactions.