aat/accountant/debit credit

mollymoo

mollymoo

mollymoo

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Is there anyone out there that can explain something to me.
Studying my AAT foundation and I am trying to get my head around the whole debit credit thing.
PEARLS is a great way of remembering but although I understand what purchases, expenses, assets and sales are, I don't seem to get to grips with exactly what revenue and liabilities are. Any information I have looked through just seem to skim over what they are.
I can only think of revenue as an income but I dont understand why it would be put in the same column as a liability, they seem to me to be polar opposites and due to my lack of understanding this has left me a bit lost.
Please help before my brain start dripping out of my ears :)
 
Unearned revenue is a liability. Like when you have been paid but haven't provided the services/goods yet.
 
Or if you've sold something on credit it them becomes a liability as you have supplied the stock but not recieved payment ?
 
Imagine you own ocuk.

Your monthly revenue is all the money that you have coming in per month.

That would include the cash people pay you when they buy from your store on the spot and it would also include all the debits you have made in other people's accounts for stuff they have ordered online BUT you have not dispatched yet (for e.g pre-orders of the new graphics cards).

Now, in the first case (cash/store) the transaction was completed on the spot. So you got paid and gave the goods at the same time. At the second case you have gotten the money but you haven't given out the goods yet. There is always the risk from the customers side that you might default on your agreement and not send the goods after all. Therefore that bit is also a liability.

Liabilities are things that you owe or orders/transactions that one counterparty has not fulfilled yet, although the other counterparty has fulfilled its obligation towards them (i.e got paid but haven't produced the goods yet). Think of it as "risk" in a transaction.

I hope I got it right! Others will hopefully correct me if I haven't.

P.S liability can work both ways. You as a business can be liable for fulfilling an order for which you have been paid and equally a customer can be liable for paying you after they have received a service or goods. It depends on the nature of the "risk" or which counterparty hasn't fulfilled their obligation to determine where to assign liability.
 
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Simplest way is to accept that this is not necesssarily logical, and just learn the rules.;)
Alternatively, I found that it's best to relate back to the other side of the entry. Cash sales are a debit to the bank, so therefore must be a credit on the P&L.
Credit sales are still a sale, therefore a credit, but the other side must be a debit to the BSheet.
etc etc
 
Phage said:
Simplest way is to accept that this is not necesssarily logical, and just learn the rules.;)
Alternatively, I found that it's best to relate back to the other side of the entry. Cash sales are a debit to the bank, so therefore must be a credit on the P&L.
Credit sales are still a sale, therefore a credit, but the other side must be a debit to the BSheet.
etc etc
Click to expand...

This is how I learned it, by relating the double entry back to what the effect will be in the bank account. With time you will get to know what entries are D/C but sometimes I still have to work it back.
 
Phage said:
Simplest way is to accept that this is not necesssarily logical, and just learn the rules.;)
Alternatively, I found that it's best to relate back to the other side of the entry. Cash sales are a debit to the bank, so therefore must be a credit on the P&L.
Credit sales are still a sale, therefore a credit, but the other side must be a debit to the BSheet.
etc etc
Click to expand...

Thats the way I have just done it lol, your right about just accepting it and as long as you know which side at least one entry just reverse it in the next.
I now think my tutor was right by saying that at this stage it doesn't matter as long as you know where to put it all :)

I do however think whoever invented T accounts was ever so slightly deranged :)
 
kgi said:
Imagine you own ocuk.

Your monthly revenue is all the money that you have coming in per month.

That would include the cash people pay you when they buy from your store on the spot and it would also include all the debits you have made in other people's accounts for stuff they have ordered online BUT you have not dispatched yet (for e.g pre-orders of the new graphics cards).
Click to expand...
OcUK charge at point of pre-order :p.
 
WillyNelson said:
:eek:

Just wait until you get further on and start asset disposals or consilodation of accounts, they will save your sanity. Everything can be worked out with T accounts!
Click to expand...

I'm sure once I understand them more they will, however for now they just seem a law unto themselves, some crazy logic that I'm just trying to get my head around, like I say just did a long example and got it all right so I think I'm starting to get it just need more examples to practice on :)
 
Cybermyk said:
Unearned revenue is a liability. Like when you have been paid but haven't provided the services/goods yet.
Click to expand...
And revenue itself is also a credit - but to the P&L.

One way of thinking of the P&L and balance sheet is as opposites. A credit on the balance sheet is a liability - i.e. negative. A credit to the P&L will increase profit - i.e. positive. And vice versa - A debit on the balance sheet is an asset, a debit to the P&L is an expense

It is all wholly logical, and one day it'll just 'click'.

mollymoo said:
Or if you've sold something on credit it them becomes a liability as you have supplied the stock but not recieved payment ?
Click to expand...
That becomes an asset - a debtor. Debit Debtors (asset), Credit Sales (revenue).

Then when the money comes in, Debit Bank (record the money), Credit Debtors (to remove the asset).
 
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kgi said:
Your monthly revenue is all the money that you have coming in per month.
Click to expand...
Revenue is just sales - it doesn't really relate to the money, as it wouldn't matter whether you got the money immediately or in a year's time.

Now, in the first case (cash/store) the transaction was completed on the spot. So you got paid and gave the goods at the same time. At the second case you have gotten the money but you haven't given out the goods yet. There is always the risk from the customers side that you might default on your agreement and not send the goods after all. Therefore that bit is also a liability.
Click to expand...
Revenue isn't a liability. Revenue is Revenue - a credit to the Profit & Loss account to show a sale that has been made in the period.

Cash received can be a liability, as you may not have performed the contract - you've not 'earnt' the income yet. This is Deferred Income, and would be a balance sheet item. This would be credited to the P&L as revenue when earnt - either as a lump, or amortised over time in long contracts.
 
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mollymoo said:
Hmmmm they are taking their time with my membership will have to wait :(
Click to expand...

Ugh, I forgot you had to login now.

Once you get your login though you should have access to 5 or 6 past papers (along with answers) for each unit you are studying.

Also, its a good place to see what the next levels will bring (Intermediate and Technician).

One thing to remember is that good ground knowledge of the debits and credits you are learning now is essential as it will form the basis of everything you do at the next levels. At technician for example you will learn about extented trial balances without using T accounts so you will need to know what goes where without referring to them.
 
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