documentation error on debits/credits?

[John Ralls]

On Nov 23, 2014, at 12:23 PM, Jeffrey H Hotchkiss <jefreiki at maine.rr.com> wrote:

> Hi, just making sure I understand the usage of debits and credits in Gnucash, as it’s been a while since I worked with accounting principles.
> 
> There appears to be an inconsistency in section 2.1.3 of the tutorial and concepts guide, here: http://gnucash.org/docs/v2.4/C/gnucash-guide/basics-accounting1.html#basics-accountingdouble2
> 
> According to the second paragraph (and a Wikipedia article on accounting principles), for an equity account, a debit is a decrease and a credit is an increase - correct? Quoting here: "In liability, equity and income accounts, credits increase the balance and debits decrease the balance."
> 
> Then why does the third paragraph say "Accountants record increases in asset, expense, and equity accounts on the debit (left) side, and they record increases in liability, revenue, and capital accounts on the credit (right) side” ?  (By the way, what’s the difference between an “equity” account and a “capital” account?)
> 
> And, under the warning at the end of the section, it says “credit is associated with decreases in asset, expense and equity accounts” ?
> 
> Could you explain the discrepancy? I believe that a credit increases an equity account, and that the third paragraph and warning paragraph are mistaken, is that right? I looked into the updating protocols - way too intimidating for me to undertake a correction.

Equity is the difference between Assets and Liabilities. In a formal balance sheet, for example an SEC Form 10K, you’ll see the balance sheet has two major categories, “Assets” and “Liabilities and Shareholder Equity”. There’s no such thing as a “Capital” account at this level; it’s a flavor of asset.

From my college accounting textbook, R.F Salmonson, James Don Edwards, and Roger H Hermanson, “A Survey of Basic Accounting, Fourth Edition”, Richard P Irwin, Homewood Ill., 1885, p. 37-38:

> Debits and Credits: The accountant uses the term debit in lieu of saying “place an entry on the left side of the account” and credit for “place an entry on the right side of the account”. Debit (abbreviated Dr.) means simply left side; credit (abbreviated Cr.), right side. A debit entry is an entry on the left side of an account.
> 
> Note that since assets and expenses are increased by debits, these accounts normally have  debit (or left side)  balances. Conversely, liability, stockholder’s equity, and revenue accounts are increased by credits and normally have credit (or right side) balances.

You’re right that the Guide is wrong in the third paragraph of section 2.1.3, which should say “Accountants record increases in asset and expense accounts on the debit (left) side, and they record increases in liability, revenue, and equity accounts on the credit (right) side.”

The warning in that section says “{Credit] is associated with a decrease in asset and expense, but an increase of income, liability and equity accounts.” This is correct.

I’ll push a fix shortly. Thanks for pointing it out.

Regards,
John Ralls