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Confusion on accounting system on Debit and Credit


#1

Dear team,
I am a bit confused on how ERPNExt is working on the accounting system in particular on the credit and debit concept.
When I receive funds, i expect that this would be placed on the credit side and when I use funds i do expect this to be on the debit side. However, with ERPNext system is doing verse versa, it takes received funds onto debit side and the expenses puts on credit side, can i get clarification or can it be corrected?


#2

There is only one rule for debit and credit. Took me a while to get a hang of it.

Asset and Expense are Debit, Liabilities and Income are Credit

It’s best not to confuse this with debit meaning money going in or out. Just accept this rule and things get much simpler.

When you receive funds, it adds to your current assets, so they go on the “Debit” side, when you send funds, your reduce your assets, so it is “Credit”

Sending funds is not “expense”, it is “payment”. Since “expense” is debit based on our rule.

Expenses usually work in 2 steps in an accrual system.

  1. Debit the expense, credit the supplier (accounts payable)
  2. Debit the supplier, credit your bank/cash account (payment)

Hope this helps!


#3

Thanks Mehta for the clarification, however, it bring more confusion when I read my bank statement which shows my income goes to CREDIT side and my withdraws from bank goes to DEBIT side. This rule is the same as that of QuickBooks which also does the same. So, when I shifted to ERPNext operation system, it where I got confused in particular when I entered received funds and found to be on DEBIT side which is different from what I used to see on my bank statement.
That’s where my confusion comes from


#4

Your confusion is normal and justified - banks and you say QB are the exception to that convention - they state the reverse so ‘consumer’ account holders don’t question why their deposits show up as a debit when they expect to see a credit :slight_smile:


#5

What @rmehta explains is the accounting convention.
What @clarkej explains actually the same if you see from the bank side (which has the accounting system).
The money you deposit is your money, not bank’s. So bank books it as liability (Credit) and add cash (Debit).
When you withdraw, bank give back your money so it reduces its liability to you (Debit), and it is not payment, and reduce the cash it holds (Debit)


#6

Thanks Rahy, your explanation makes far more sense than mine!


#7

Thanks Rahy for the clarification, hope now I’m getting this clear, i will continue making follow-up and adopting.
Thanks for this ERP platform for making us meet from all over the globe


#8