Debits and Credits

Accountants have their own curious methods for referring to changes on each side of the balance sheet. Traditionally, assets are shown on the left and liabilities and capital are on the right. Dollar increases on the left side are called debits. Increases on the right side are called credits. Debits and credits are only allowed to be positive numbers; that is, one does think of recording a negative debit. Debiting an asset always means increasing its dollar value. To reduce an asset's dollar value, it is credited. No particular connotation of good or bad should be assigned to the words debit and credit; they are simply synonyms for dollar increases left and right.

There may be a question at this point. If negative numbers are not used on the balance sheet, how do we keep track of things that have balances that go up and down? Enter the "T" chart. We set up a "T" chart for a specific asset, like cash, defining both a right and left side on the cash "T" chart. (Refer to Figure 1-6 for an illustration.) We can then record all credits on the right side of the "T" chart and then net them with the starting balance and subsequent debits on the left side. Then, when it is time to compute a new balance sheet, we record the new net amount on the left side of the balance sheet for cash. "T" charts are not mini-balance sheets. They do not convey an equation. Their left and right sides do not need to balance. They are simply a recording mechanism, in chart form, for individual transactions, debits and credits.

A listing of all the cash debits and credits during Period 1

Debits

{receivables)

paid

$10,500

Rents paid

Shor1-ternr> note paid off

$25,000

5325

Purchased syppliHs

55,000

Short-leiin debl paid

Total debits

S35.&QC

£6,850

Total credits

Balance sheet entries for Period 1: Assets

Debit cash $23,650 Credit note: -325,000 Net assets change: S3.&50

Balance sheet entries for Period 1: Assets

Debit cash $23,650 Credit note: -325,000 Net assets change: S3.&50

Debit payables: -SJ ,850 Debit short-term debt: -$5,000 Net liabilities change: -$6,050

Credit retained equity: Si 0,500 Net Equity Change: 510.500

Assets - Liabilities + Equity

$3,650 = -$6,850 * $10,500 Figure 1-6: "T" Chart for Cash.

However, if cash has been credited, we also need a second change, a debit, on the balance sheet to maintain the balance. If cash is to be credited, then a liability must be debited (decreased) or another asset is debited (increased). For example, we could use the cash to buy an asset and all would be in balance. Again refer to Figure 1-6 to see how this is done.

Project managers in some companies are asked to review the monthly "trial balance." The trial balance is a listing of all the debits and credits recorded in a period. Naturally, they should balance. Of course, a debit or credit could have been made to a wrong account and the trial balance still balance. That is where the project manager can add value: by determining that all the project debits and credits have been applied to the proper accounts.

Here is an important point: balance sheets do not record flows, that is, a change in dollars over a period. They show only the balance in accounts on a specific date, like apples in a barrel. To see a flow, two balance sheets — one at period beginning and one at period ending — need to be compared.

How about your ATM or "debit" card that you carry around? Is it correctly named? Yes it is; let us see why. The money in your checking account is a short-term liability on the bank's balance sheet. It is money owned by outsiders (you) and thus it conforms to the definition of a liability. It finances or pays for an asset of equal amount, the bank's cash on hand. Everything is in balance. Suppose you want to take some of your money out of the bank. This will decrease the bank's liability to you. Recall that transactions to liabilities are credits (increases), so in order to decrease a liability we record a debit to the liability. To wit: a decrease of a liability is a debit to the liability; thus the "debit card." Now, of course, we still need the second transaction to the balance sheet to maintain the balance. If the liability is to be debited, then an asset must be credited (decreased), like the bank's cash on hand, or another liability is credited (increased), like a short-term note, to obtain the money to pay you.

Now that we understand a little bit about how accountants do their math, let us get back to project management.

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Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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