Comment by rahimnathwani
4 years ago
"If you credit AP, you're increasing liability, if you credit AR, you're increasing assets."
This is incorrect. If you credit AR, you're decreasing assets.[0]
[0] https://www.freshbooks.com/hub/accounting/debit-and-credit#:....
Your link shows that AR is a subaccount of Assets and AP is a subaccount of Liabilities, so credits to each have the opposite effect with respect to a balance sheet. GP has a different understanding of the "polarity" of debits and credits, but if anything this seems to support rather than undermine proposition "A" above?
"so credits to each do indeed have the opposite effect with respect to a balance sheet"
I think what you mean here is that a debit balance in an asset account is presented as a positive amount, whereas a debit balance in a liability account would show as a negative amount.
This is true, but that doesn't mean a credit has the opposite effect depending on whether it's applied to an asset or liability account. Consider that you have two different accounts with your bank:
- a current account (usually the bank owes you money, i.e. usually a credit balance from the bank's POV)
- a loan account (you bought a car on credit, and owe the bank money, i.e. a debit balance from bank's POV)
For the bank, the current account is a liability ($1,000) and the loan account is an asset ($25,000).
When you deliver a bag containing $5,000 to the bank, the bank will credit one of these two accounts. They'll either increase the current account to $6,000, or decrease the loan account to $19,000.
In either case, the credit has the same effect: your net debt to the bank is decreased by $5k.
rahimnathwani is correct here and has explained himself well. I generally don’t think of equity as a liability, but if you think of it is money owed to shareholders, then a credit can indeed be seen as an increase in money owed. Since debits always equal credits,
money OWNed = money OWed
And thus:
Assets = Liabilities + Equity