Help in understanding a basic accounting principle accounting, understand, actually, decrease

Benjiko

'An entry which increases an asset account is called a debit.'

So if my bank account is my asset account, when I debit money, money actually goes out so it is a 'decrease'. But the above statement has it the other way round.

Kindly help me understand this.

bleach

I "think" its because the bak statement is from the perspective of the bank. The money held in your account is a liability for the bank.

Analti_Calte

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Edited 1 time(s). Last edit at Sunday, July 10, 2011 at 08:29PM by Micholien.

anish

Casey is right, when you look at your bank statement, the statement is shown from the perspective of the Bank. The money you deposit is a liability to the bank, therefore when you withdraw money their Liability is reducing hence a debit.

From the companies perspective, cash/bank a/c are an asset, hence the rule applies, i.e., 'An entry which increases an asset account is called a debit.' For example when you by a machinery for cash following transactions occur:

Debit: Machinery A/C ( Asset increasing, hence the Debit)
Credit: Cash/bank A/C (ASSET decreasing, hence the Credit)

Hope this helps!

OmarAdnan

To add to Shanan, debit is increase of asset or decrease of liability. Your account with the bank is an asset for you but a liability for bank. So when you withdraw cash , bank bebits the amount indicating a reduction of his liability.

Bank statement is a statemnt of bank's liability. So try to recognize it from banks perspective.

anish

I was told were not supposed to learn/know debits and credits. Is that not true?

infinitybenzo

Spongebob, you need to have an understanding of how the accounts interact. When in doubt: A = L + O.E.

Think of Assets as the property of the business. How did you pay for them? Through either 1) Debt (Liability) or 2) Your own money (O.E).

Forget the example of your bank. That confused me when I was first learning accounting too. Just look at the statement

A=L+O.E
If A went up then L or O.E must have as well.
If A goes down then L or O.E must too.