Okay, so George Burnham, the owner of George's Catering, has an accruedexpense - he owes $200 to the telephone company for the telephone bill for April...
j) George Burnham pays the amount owing to the telephone company on the 13th of May.
Again the easiest part of this transaction is the cash component. Cash of $200 is definitely paid. So bank decreases. Bank is an asset, and assets increase on the debit side and decrease on the credit side. So we credit bank.
Our creditor (liability) exists currently in our records at $200, on the credit side. If we are now paying the telephone company, this means that we owe them less. Creditors decrease. Creditors are a type of liability, and liabilities increase on the credit side and decrease on the debit side. So creditors are debited.
Here's the entry:
Note that the debit of $200 to the creditor account causes it to amount to zero – in other words, we are showing that the debt towards the telephone company no longer exists.
Let's go over one more example:
k) George sees that he has quite a bit of spare cash, and so decides to pay back some of the loan from the bank. He writes out a check for $4,000. What happens to our equation?
The answer is identical to what happens when we pay off a creditor (as in the first example above), in that both our bank as well as the liability are going to decrease. Obviously the only difference is that this time our loan will decrease, not the creditor.
Bank is an asset and decreases on the credit side.
Creditors is a liability and decreases on the debit side.
The accounting entry is thus:
The loan is not reduced to zero (as with the creditor) but to $1,000. In other words, we are showing that we still owe $1,000.
Once again, in summary, you can see that:
For every transaction there are two entries. For every transaction there is a debit. For every transaction there is a credit. There are no exceptions.
Not simple? Okay, not to worry - just go back and restudy the lessons you didn't fully feel good about. Troubled with this monster called debits and credits? Go back to the lesson called Debits and Credits: What They Really Mean, or even to an earlier lesson (if needed).
In our next section we are going to take a step back and look at the big picture in accounting, the Accounting Cycle - the series of actions a bookkeeper or accountant takes to record, categorize and present the financial information of a business.
Sorry to tell you, but that does not, however, mean we're done with debits and credits. We'll be covering them here and there throughout the remainder of the online lessons. Not that there's anything wrong with debits and credits, right? Right. The monster has been slain... okay, not quite... but he's definitely hurting...
If you have come this far and really get what we did, then you know enough right now about debits and credits to debit or credit virtually anything in the subject (well almost)! And that's a lot more than most accounting students!
So well done for getting this far! You are doing very, very well.