Financial Management Discussion Week 2

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Discussion 1: “Debits and Credits.” Students will respond to the following: o Maria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Upon what does Maria make this assumption? If you choose one over the other, what is your rationale?

It depends on Maria Alvarez perspective. For explaining the rationale of this introduction, I would like to explain the meaning of debit and credit first. As stated Chapter 2 (Weygandt&Kimmel&Kieso, 2010, P.49) the terms debit and credit are directional signals and entering an amount on the left side of an account is called debiting the account, making an entry on the right side is crediting the amount. We also record increases in cash as debit and decreases as credit. From this perspective debit balances are good and credit balances are bad. It means Maria`s assumption is correct. But in reality this is not correct because Maria is looking only the left side of the -------------------------------------------------

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accounting equation which is “Assets” side. And “Cash” is under the “Assets”. For this reason any increase at the “Assets” side records as “Debit” and any decrease at the “Assests” side records as “Credit”. At the other side of the Accounting Equation there are “liabilities” and “Stockholders` Equity” and for this side (right side) of the equation above assumption is not correct. For example there are five subdivisions of “Stockholders` Equity” (common stocks, retain earnings, dividends, revenues and expenses) and for each subdivision situation is different. Let`s take “Revenues”. When a company earn revenues stock holders` equity increases and any increase in revenues records as “Credit”, on the contrary any decrease in revenues records as “Debit”. This is exactly same for “Common Stock” and “Retained Earnings” accounts. For “Dividends” and “Expenses”...
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