From the course: Financial Accounting Foundations
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Debits and credits
From the course: Financial Accounting Foundations
Debits and credits
- The debit and credit system can be summarized in two basic rules. Increases in assets are written on the left side of the page. Liabilities and equities are exactly the opposite. That's it. Now let's talk about why this marvelous debit and credit system exists. The accounting equation can be used to analyze transactions. To refresh your memory, the accounting equation is assets equal liabilities plus owner's equity. Now, although it makes conceptual sense, a row and column spreadsheet analysis format based on the accounting equation can be quite cumbersome. Suppose that a company has 200 accounts and 10,000 transactions each month. The resulting spreadsheet would quickly grow to unwieldy size. When the process underlying modern bookkeeping was formalized 500 years ago, maintaining a 10,000 row by 2000 column spreadsheet by hand, just not practical. In addition, the realities of manual arithmetic made it desirable to have a system based as much as possible on addition rather than on…
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