what this is saying here is very very basic and this is very important so pay attention here so for every action if i punch with this hand this hand okay so in this video we're discussing the two different methods that i've seen throughout my career in accounting over the last 16 years of recording your journal entries your debits and credits right there are two methods that we'll discuss today one relies on remembering an acronym dealer and the other method relies on understanding the foundation the accounting equation the story of everything in accounting right and from
what i've seen what people do is when you start out as an accountant you normally begin with this right you're mechanically remembering and we'll go through it in a minute here with examples you're remembering mechanically how to record your debits and credits right based on remembering this acronym here dealer and then as you progress in your career you understand the foundation of accounting you use this this becomes a second nature and this is the one that i recommend once you get the accounting equation and use it to record your debits and credits you're unlocked as
super power as an accountant right that's kind of super charging career because you're going to be faster in your feet whenever you're dealing with a complex accrual or a reversal in general ledger and you know your debits and credits based on an accounting equation you're just going to move faster than your peers and that's going to unlock a lot of promotions a lot of progress in your career you're going to be able to move faster with method number two all right so having said that it's important to realize and remember why we have this double
entry accounting of debits and credits to begin with why are we even doing this right and the easiest way to think of this is that it's similar to the laws of physics that says for every action there's a reaction that's going to be equal in force and opposite in direction so for every action if i punch with this hand this hand here right i have an action i have a reaction from my other hand that's going to be equal in in force and opposite in direction so the same thing in business when you have a
transaction for example like spending cash let's say for example you buy an asset like a laptop right so your cash went down but on the other hand your assets or computer went up so you have cash going down but you have your computer going up and your assets right so you have an action or reaction that's the easiest way to think about why we have debits and credits in the first place all right now enough of that let's jump into these two methods here and understand how they work and then i'll give you some examples
to illustrate these two methods here so for method number one dealer this is an acronym that you remember right and dealer the first three letters are gonna be the debit nature accounts and the ler is going to be the third that second three letters are gonna be the other side so with dealer the d is for dividend the e is for expense and the a is for asset and what we're saying here is that these three types of accounts have a debit nature right and on the other side of the world dealer we have l
l stands for liability e stands for equity and the r stands for revenue okay and what we're saying here is that these three accounts have a credit nature meaning that when you have one of these accounts that you want to increase its balance you're gonna be debiting that account and similarly when you have one of these three accounts that you want to increase its balance you're gonna credit that account right so that's a very simple way to remember your debits and credits and we'll go through some examples here in a minute but first i want
to show you the accounting equation method because in my opinion this is going to unlock a lot of superpower in your career and you let me know in the comment box below what do you think in terms of which one you're using today are you using this or something similar or are using the accounting equation that we'll talk about here in a second so with the accounting equation now the accounting equation says that assets equals liabilities plus owner's equity right and this is a story of everything in accounting if you understand this formula here you'll
understand everything in accounting right assets equals liabilities plus owner's equity let's first spend a minute in understanding why this formula here makes a lot of sense also as a quick announcement the controller academy is now open for enrollment you can find out more information by clicking the link in the description box but in a nutshell it's a five-hour online course that can take you from an entry-level accountant to a corporate controller put another way this course is a download of everything that i know as a corporate controller and into your brain so the reason why
this formula here makes a lot of sense is because it's saying something very basic what this is saying here is very very basic and this is very important so pay attention here so what we're saying here is that what you own in a business the stuff that you own your own stuff right your own assets right always equals what you owe right so imagine a scale with two sides some stuff here and some stuff here and this side is what you own in the business or the assets the stuff equals what you owe right then
you might look at this and say well bill what are you talking about liabilities is what you owe owner is equity you don't know that right wrong you owe equity the business owes that money to someone who does it owe it to right do the owners the owners one day if they want to liquidate the business this is what the what they're owed in the business so this is what they can take out right so what the business owns its assets equals what the business owes which is its liabilities to third parties and owners equity
to the owners of the business itself all right now with your understanding that this formula here makes a lot of sense it's only saying that what you own in the business equals what you owe that's that's all it's saying right it makes a lot of sense now this formula here is gonna unlock all of that with just understanding the formula let me explain this bit here this is important right so what we're saying here is that the two sides of this assets equals liability plus orders equity the asset side is going to always be a
debit and the liability on equity side is always going to be a credit right so that will help you do your debits and credits for assets liabilities and equity so then you might come along and say well bill what are you talking about what about all of the other accounts what about dividends expenses uh what do we got here revenue what do we do with these things right they don't exist here okay so i'll tell you how they exist here so when we look at something like dividends right whenever you measure anything you measure it
on equity right what does dividend do to equity right dividend is going to reduce equity right so that means a dividend has the opposite nature of equity is equity if equity is credit dividend is going to be a debit so dividend is going to fall here now same thing expenses what does expenses do to equity right and this is very important what does expenses do to equity expenses will reduce equity right when you spend money you're reducing equity that means it has the opposite nature of equity if equity is credit expenses is a debit so
that's why i didn't like you when i said that the accounting equation here explains all the debits and credits in it you don't have to remember this this is good to remember at the beginning of your career i'm fine with it even for now sometimes i have this handy as a cheat sheet which is fine but understanding this will help you move very fast when you are trying to resolve accounting questions debits and credit questions okay so we said that um on the debit side we got then what do we got we got the assets
on the debit side we got dividends we got expenses all of that all of these are debits right then you might ask me then well bill what do we do with revenue all right same thing same thing with the for expenses when we set the expenses we ask those expenses what does it do to equity we set expenses reduces equity therefore it's going to have the opposite nature fine what about revenue right same question what does revenue do to equity very simple revenue will increase equity when you get money coming in that will increase your
equity right then it's going to have a similar nature to equity which means it's going to be a credit so we're going to have revenue on this side right that's going to be a credit therefore the accounting equation can explain the debits and credits you can remember debits and credits by remembering the accounting equation assets equals liabilities plus owner's equity this is fine if you want to use this dealer it's a good cheat sheet good way to remember quickly dividend expenses asset liability equity revenue uh but the better way if you really want to unlock
a superpower as an accountant is understanding the iconic equation and how it determines the debits and credits debits to one side which is the assets and then credits on the other side liabilities and equity when you're trying to determine dividend expenses and revenue you think to yourself what is the effect on equity if it has an opposite or a bad effect on equity it means it moves in the opposite direction of equity which equity is always a credit okay so i think this makes a lot of sense if you unlock if you remember this is
going to unlock a lot of understanding for you so go ahead and watch this lecture again to understand the accounting equation and i'll see you in the next lecture all right how about we go through a couple of quick examples so that you can concrete your understanding of what we talked about here so let's talk about a couple transactions the first one is that let's say you receive a seed investment of a hundred thousand dollars right a seed investment of a hundred thousand dollars so receive a seed of a hundred thousand dollars right i see
the investment is an initial investment in the business right so what's going on here remember that we said with debits and credits it's going to be similar to the laws of physics of action and reaction you have action and reaction right so double-sided journal entry you have on one side you have cash being received right so you have cash coming in right and then the other side of that journal entry is going to be something but is it revenue no you haven't really sold anything right so what is it then it's equity right so this
is going to be part of equity okay so you got equity here all right let's do it in the form of the account so when we are recording journal entries we're using t accounts all right we got a hundred thousand dollars coming in so cash coming in cash went up right cash is what is an asset so if you use this method here cash is an asset to bring it up it's a debit right so it's gonna be debit to asset for a hundred thousand dollars right and equity it's right here it's credit in nature
to increase it it's gonna be also a hundred thousand dollars on the credit side okay and if you do it using this method it's going to be the same thing so asset coming in cash coming in 100k right it's an asset right it's a debit then it's 100k in the debit side equity uh you're increasing equity by 100k equity is in here in the accounting equation it's a credit you would have credit on this side okay so that's one example let's go through a second example here all right purchase a computer for three thousand dollars
okay so buy pc for three thousand dollars all right so you got two sizes remember action reaction uh you spend some cash to get this right so you have cash right and you have a computer that's the opposite uh the reaction or the opposite right so you got cash you got pc or computers right this dual t account so here's the t account for cash t account for computer right you got three thousand dollars for cash now cash is going out the door right so you're reducing cash to reduce cash it has a debit natures
to reduce it you're gonna have to credit it so credit the cash for three thousand dollars right and you got computers that's going to be going up to increase an asset right right here it's a debit so that's three thousand dollars your debit secrets are always going to equal so as you have here credit you have a debit now they're equal uh that's the second example let's go through a third example real quick here what have we got we got uh we spent on marketing thirty thousand uh five thousand dollars marketing so spend five thousand
dollars marketing expense all right so you got the t accounts you have an expense which is marketing expense you got cash all right as you spend cash cash is going out the door right so it's going to be a credit of five thousand dollars and you have marketing expense expense based on this formula here for dealer expenses right here it's a debit so that's going to be five thousand dollars you arrive at the same result if you use this method here where you have the asset right here reducing it as a credit which is what
we did here for the expense also has a debit nature to reduce it it to increase it rather sorry to increase the expense the expense will be a debit here to increase the expense let's through go through one final example here all right we have thirty thousand dollars in revenue thirty thousand dollars in revenue so uh made 30k in revenue all right so when you make 30k in revenue uh what are the two accounts that are involved here so one of them is revenue and the other one is most likely accounts receivable right if you're
selling a credit so you have accounts receivable which is an asset all right so you got your t accounts here one for revenue and one for accounts receivable all right so revenue is increasing revenue is going up or based on this is a credit so you got 30k right and you got ar which is an asset to increase it it's a debit right and if you do it this way it's the same thing right so you got revenue well revenue is always going to be a credit because it shares the same nature as equity right
so because it increases equity so it moves in the same direction it's a credit credit revenue well they are that's an asset right to increase it it's going to be a debit and all of your debits that are going to be equal to credits so that's it for this lecture here i hope you enjoyed it if you liked it give it a big thumbs up and share it with someone who might need it and i'll see you in the next one
