Accounting Question (Credit and Debit)

[MikeVic]

Ok, my initial understanding of a credit meaning a "plus" and a debit meaning a "minus" is completely wrong.

So now, from my understanding (and help from Wikipedia): Asset and expense accounts increase in value when debited and decrease when credited. Whereas liability, equity, and revenue accounts decrease in value when debited and increase when credited.

I have this scenario here that I'm wondering if it makes sense. Once a company makes an invoice for a certain item being sold... they want an inventory account to be credited, while a revenue offset account to be debited. In code, I will be removing the value from the inventory account since they're selling it... so my reasoning is that since this is an asset (inventory), we credit to decrease. So now we need a debit to balance the general ledger.

However, maybe I don't understand what a revenue offset account is? I view it as a "revenue" account, and so when I debit it... I'll be decreasing it. But don't I want to increase it since it's revenue being added? Or is the "offset" word really changing the meaning of the word "revenue," and so we DO want to decrease here as well?

This might be confusing, so if I can't get any help, I'd understand completely. Was hoping maybe someone can help make sense of this for me?

[Jas_lov]

I think you actually make two journal entries. One is to debit Cost of Goods Sold which is an expense account and credit Inventory. The other is to recognize the sale by debiting Cash or Accounts Receivable and crediting Sales.

[Pumpy Tudors]

Argh, this is bringing back memories of the Principles of Accounting class I took in college!

Well, I guess it would bring back memories if I'd ever actually attended that class.

[SnDvls]

Originally Posted by MikeVic

Ok, my initial understanding of a credit meaning a "plus" and a debit meaning a "minus" is completely wrong.

If you ever worked in a bank then that might be why. Accounting is opposite from banking.

[KevinNU7]

You question is very confusing, and this is coming from someone who deals with debits/credits all day.

One way to look at it is that if some mischarged your company they would have to issue you a credit memo to give you back the money. i.e. credit is getting money and debits are losing money.

Now what makes it confusing is revenues are shown as negatives and expenses as positives.

[MikeVic]

Yeah, I've never had to deal with accounting before so I was trying to understand it using the scenario I have to deal with... needless to say I was confused. I think I need more clarification. Jas_lov's example makes sense to me, but my scenario seems weird. Doesn't seem right.

[Doug5984]

Also the way they taught us debits and credits is simple: Debits = Left, Credits = Right. Some debits increase some things, while decrease others and the same goes for credits...so all debit and credit mean are right and left.

I'm sort of confused by your wording but I think with this is what you would want.
When you sell the good this would be your entry...

Cash (or Accounts Recievable) $XXX
Inventory $XXX

After that it depends on if you have a perpetual or periodic inventory system?

I could be completely wrong though...I've been study managerial accounting the past few days so my brain isn't thinking straight.

[Jas_lov]

Maybe by "offset" revenue account they mean the expense account, Cost of Goods Sold. You need the 2 entries and I'm pretty sure that's correct...

A/R or Cash xxxxx
Sales xxxxx

COGS xxxx
Inventory xxxx

I assumed you were using the perpetual method since you were making just the one entry pertaining one sale, but I would get more clarification from whoever told you this on exactly what they want.

[bryce]

yea, jas_lov has it exactly. two entries b/c of the matching principle - record your expenses (CoGS) when you record your revenue.

[Suburban Rhythm]

After reading this...I am really glad I don't use all that principles stuff I learned in school at my job!