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Have you seen the show Princess on TLC? A “Princess” spends money like crazy using her credit card while avoiding bills and the financial burden that she places on her family and friends. Most of the young women turn around their lives, and they learn how to better manage their budgets. And how do they do it- they stop spending credit like it’s free cash!
This is the worlds perception of credit. It can be bad if you spend more than you can afford, and is good for when you need to borrow; when you need a new car or want to buy a house.
In the accounting world, it’s not so clear cut. As in debits, credits also swing both ways.
Lets go back to my example of yarn supplies.
I bought $100 worth of supplies and I learned that I had to make two accounts in my bookkeeping software. I made a debit to Yarn Supplies and a credit to Paypal. If I were thinking of credit in terms of a credit card, this example would make sense. My Paypal account isn’t my actual bank account, but a medium in which to pay for purchases. Eventually, if I keep buying yarn with my paypal account, my account would go to zero and I’d have to fill it up again by transferring my bank account money to paypal. But I digress.
In this new example, I sold a pair of Bella Mittens for $100 using my paypal account, and here’s how the old fashioned way of showing it:
Now my credit has new meaning. I credited an account called Bella Mittens Sales, which tally’s up all my sale amounts and gives me a credit balance. A credit balance in a Sales(Revenue) account means that I am well on my way to getting rich. In turn, my paypal account has also increased, because it is an asset and debits increase asset accounts.
In Wave Apps, the transaction would look like this:
Click on “Add Income”
1. Credits increase revenue(sales or services) accounts.
2. Credits decrease assets(paypal, bank) accounts
3. Debits increase assets(paypal, bank) accounts
3. *Debits decrease revenue(sales or services) accounts
*For Experts: This isn’t a normal transaction. When there is a sale or service performed but not paid, it becomes an account receivable or payable.
Want to know more about Wave Apps? Sign up to my mailing list to get your free ebook!
- Learn how to make an account on waveapps.com
- Learn how to link your Etsy account
- Learn how to link your paypal account
- Learn about Transactions
- Learn about the the basic settings
- Learn about the Income Statement
If you are a blogger and wish to review this ebook, I’ll be very happy to send it to you!
Have a question? Leave a comment below!