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by tenacious_tuna
1406 days ago
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> Lets say you sell a service to someone, a year of service for $100. This sounds simple, debit cash for $100 and credit sales revenue for $100 I'm confused, this seems like you would credit both cash and sales revenue $100... since you'd have received $100 from whomever bought your service, so youd have $100 more cash, and for tax accounting, you'd have sold $100 worth of stuff as well. |
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Assets = Liabilities + Equity
and its more dynamic corollary since Equity = Capital + Income - Expenses, simplified to keep everything positive:
Assets + Expenses = Liabilities + Equity + Income
Assets and Expenses are considered to have a debit balance and the other three have a credit balance. Debit represents money "owed to" the business and credit represents money "owed by" the business. People get hung up on these terms because they think of credits as good things when their checking account gets credited and debits as bad things. But that terminology is because the bank has exactly the opposite relationship. Your checking account is their liability (and your mortgage is their asset).
Thus, when you are paid $100 by bank transfer for a service, you credit "Sales" by $100 and debit "Checking" by $100 as well.
In the accrual method, you might prefer to credit "Sales" by $8.33 and "Prepaid Sales" (a liability) by $92.67, and debit Checking by $100. Then each month you would debit "Prepaid Sales" by $100/12 and credit "Sales" the same amount. This would keep you from having weird ups and downs when looking at monthly income statements. It gets tedious to do by hand, but computers make it easy when they do it right.