More on Debits and Credits

As we became managers of our own money and opened checking accounts we got the idea instilled in us that when an account is credited that’s an increase and when an account is debited that’s a decrease. That’s simply the bank’s side of the equation of the general ledger account representing your money. Like I said yesterday, each of the types of accounts generally has either a debit or a credit balance. This is what your financial statements look like:

Balance Sheet:
        Assets (debit) = Capital (credit) + Liabilities (credit)
Income Statement:
        Revenues (credit) – Expenses (debit) = Profit (credit) or Loss (debit)*

*At the end of the year the profit or loss is “closed” into the capital account. On a very basic level, capital is the sum of profits over the years and any investments made by you or other investors less any money taken out of the business.

Today I’d like to give you a very general picture of the financial statement of an artist and tomorrow go through some examples of transactions you might make.

Balance Sheet
  Assets
     Cash
     Accounts receivable
     Inventory
     Equipment
  Liabilities
     Accounts payable
     Credit Card
     Sales tax payable
     Deposits from clients
     Loans
  Capital

Income Statement
  Income
     Sales
  Expenses
     Materials
     Small tools/supplies
     Shipping
     Art Fairs
     Workshops
     Advertising
     Bank fees
     Depreciation Expense
     Insurance
     Office supplies/expenses
  Net Income (Loss)

A beginner’s intro to debits and credits

Balanced accounting is like a math equation, one side must equal the other, the debits have to equal the credits. All of your financial accounts (assets, liabilities, equity, income and expense) have a normal balance as either a debit or a credit. When you increase one account, another account has to be increased to keep everything in balance.

As a simple example let’s say you sold a print of one of your art pieces for $30 cash. Cash is an asset account (it’s what you own) and Sales is an income account. Asset accounts normally have a debit balance and Income accounts normally have a credit balance. To record this transaction you would debit (increase) cash and credit (increase) sales each for $30. The equal increase to both accounts keeps everything in balance. Sounds simple, right? It is, as long as you have a good chart of accounts, that you know what type of account you are increasing or decreasing and that you always keep everything equal.