A good one will start you off with simple transactions and most importantly, make you work out the balance each time. That's how I learned when I started training as an accountant. Once you get the hang of that, you see where it's going. So let's do it with your example.
Firstly we have to understand the concept of "capital", which is a kind of fictional thing that means the worth of the business, but we have to put it in to make the whole thing work. You've got $5000. That's not only cash, it's the capital you have to lend out. So the starting balance is debit cash $5000, and credit capital the same amount. OK so far.
Then you give a company $5000. In your books, that's debit the company, credit cash for the same amount. Balances now are cash zero, company debit $5000, capital credit $5000.
Then it gives you $6000. That's debit cash $6000, credit the company $5000 to write off their debt to you, the remaining $1000 has to go somewhere, and it goes into capital. Now you've got cash debit $6000 and capital credit $6000. Your account with the company is $5000 each side so forget it - it balances off to zero.
It's still all in balance. But look, your capital has gone up! That increase in capital is your profit. You put $5000 into the business, the capital is now $6000, and that is balanced off by the fact that that is represented by $1000 more in cash than you started with.
See how it works?
Hi,
You have a little bit misunderstanding with current account. You should remember that it's a type of bank account. Debit- Credit system in bank account is same whether it is saving or current. If money come into your account it shown credit in your bank statement & go out from your account it shown debit in your bank statement. Now, we think $10,000 balance in your account, you have disburse & 5,000 from your account. It shown debit in your bank statement & balance will be $5,000. When company will give $6,000 it shown credit in your statement & balance will be $11,000. Profit -loss or interest its not function of your bank statement. Its a function of your financial statement.
If you take out 5000 and put in 6000 you have 1000 credit, which you withdraw if you wish.
In a current account, I understand that the debits and credits must balance off.
Debits= money going out, and Credits= money going in from clients??
How can the accounts balance if you are trying to make a profit.
For example you give a company a loan, giving 5000 dollars (debit your account because money is leaving?). The company gives you back 6000 dollars, 1000 as interest for the time (credit the account as you are receiving money?). There is now a 1000 dollar deficit. How do you balance this account for profit?
I'm a bit confused, maybe there is a misunderstanding in my fundamental knowledge, any help would be appreciated.
