Distributions, the amount of the Retained Earnings that the owner(s) actually remove.
The obvious formula is:
ASSETS - LIABILITIES = CAPITAL
But this is traditionally written in this form:
ASSETS = LIABILITIES + CAPITAL
The Busy-ness of Accounting
Now imagine that in is the end of the day. You know that during the day sales were $1,000 but of that amount, expenses of $400 were paid. So the amount of profit remaining at the end of the day is $600. The business has the $600 by depositing it in the checking account but the business naturally owes the same money to the owner. Both sides of the equation go up by $600:
(Assets + $600) = Liabilities + (Capital + $600)
DEBITS and CREDIT
The busiest accounting activity for most businesses is checking the change each day in this equation by keeping records of daily Sales and Expenses. During this activity, we hear and use the terms "debit" and "credit." By "international agreement," we follow these rules:
- We consider Assets to be "plus" amounts and Liabilities and Capital to be "minus" amounts.
- We call the "plus" amounts "Debits" and the "minus" amounts "Credits."
- We write the Debits in the left column and the Credits in the right column.
- We abbreviate Debit as "DR" and Credit as "CR." There is no "r" in "Debit," but the two "r's" look balanced. In recent times, some banks use the abbreviations "DE" and "CR." That might make more sense, but it is like spelling words like "nite" and "thru."
The Meaning of Brackets
"Brackets" are written either as parentheses or the lesser-than and greater-than sign. We normally think of brackets as meaning "minus." That is not what brackets mean. Instead they mean "the opposite of what you would normally expect to have here." For example:
You may see a list of Current Assets listed in this fashion:
Checking Account First Bank $3,700.25
Checking Account Omnibus Bank $2,483.40
Checking Account American Bank <$ 954.43>
Savings Account First Bank $4,305.07
The Checking Account at American Bank is overdrawn. In this case the brackets do in fact mean "minus."
But you may also see a list of Current Liabilities in this fashion:
Sales Tax Payable $1,705.00
Payroll Tax Payable $3,607.23
Credit Card Payable <$1,304.04>
Trade Accounts Payable $2,607.32
The word "payable" clues you that these are Liabilities. We already said that it is universally agreed that Liabilities are considered "minus" amounts that we call Credits. The list above tells you that somehow you overpaid your credit card balance. The figure is in brackets to show you that it is the opposite of what you would normally find here. In this case the brackets mean "plus." Just remember that brackets mean "opposite."
Your Left or Mine?
We debit deposits to our checking account and credit checks. But banks call deposits "credits" and charges "debits," or something like that. It is confusing, but it should not be. Two people are facing each other. One says, "I think we should face left to see the sunrise." The other person asks, "Your left or mine?" The answer is "Mine." Both turn and face the same direction without either complaining, "Whew! That left-and-right thing sure is complicated!"
Copyright © - 2002 Dutch Hawkins Mandeville, LA USA - All Rights Reserved
October 16, 2002