acc400r1RMFwk2 - ACC 400 Accounting for Decision Making...

ACC 400 Accounting for Decision Making
ACC/400 Week Two
LIABILITIES AND EQUITY
Introduction
Why is it that when we deposit funds at a bank, we use the “credit” slip? When we write checks,
we have been trained to “debit” our checking account register? I thought that an asset account
had a normal debit account balance; therefore an increase is a “debit”, right?
In the standard accounting equation (Assets = Liabilities + Owners Equity) cash is an asset and
should be increased with a “debit”. So why does an increase (to your checking account) result in
a “credit”. The answer can be found in Sir Isaac Newton’s third law, “for every action, there is an
equal and opposite reaction”. Let me explain.
As a student, you mange your available income (your pay) to meet your expenses (rent, gas,
food) on a daily / weekly / monthly basis. Your personal financial statements contain a multitude
of accounts, cash, expense accounts, receivables, liabilities, etc. Every time you conduct a
transaction (e.g. buy gas), the effect is to YOUR financials. At the exact same moment (i.e.
Newton’s third law), the gas station at which you purchased gas at is booking an “equal and
opposite” entry.
So, simply put, the answer to the question posed above is that when you “credit” your account,
you are actually “crediting” a liability account on the banks financial statement.