Re: 'Topic Sentences'

"David Friedman" <ddfr@xxxxxxxxxxxxxxxxxxxxxxxxx> wrote in message
news:ddfr-9DF0C4.17254830102005@xxxxxxxxxxxxxxxxxxxxxxxx
> In article <11mai3o8no8t715@xxxxxxxxxxxxxxxxxx>,
> "Patricia C. Wrede" <pwrede6492@xxxxxxx> wrote:
>
>> > To put it differently, debits work in opposite ways on the two sides of
>> > the balance sheet because an increase in assets has the same effect as
>> > a
>> > decrease in liabilities, from the standpoint of the total worth of the
>> > firm--what the stockholders own. Similarly for credits. But if you are
>> > thinking in terms of the total worth of the firm, a credit ought to be
>> > what increases it, a debit what decreases it--and the actual meanings
>> > are the other way around.
>>
>> No, they're not. *Both* debits and credits can increase the total worth
>> of
>> a firm, as definied by the bottom lines on the balance sheet. *Either*
>> of
>> them can decrease the total worth of a firm, ditto and likewise. If you
>> prefer to define "the total worth of the firm" as the capitalization,
>> then
>> you're right about how things work -- because capitalization (or Equity)
>> is
>> a section on the right-hand side of the balance sheet, where credits
>> increase accounts and debits decrease them. That says nothing at all
>> about
>> how they work, or should work, over on the *left-hand* side of the
>> balance
>> sheet.
>
> Stockholders equity is an (imperfect) measure of the total worth of the
> firm--the stockholders, after all, are the owners. Do you disagree? I
> specified "what the stockholders own."
>
> How else would you define the "total worth of the firm" if not as assets
> minus liabilities--recognizing, of course, the the accounting measures
> for both are necessarily very imperfect ones?

Sorry, I think I was unclear. I was talking about limiting "the total value
of the firm" to those *accounts* shown in the equity section of the balance
sheet. As soon as you define "stockholder's equity" as "assets minus
liabilities," you're right back to the fact that debits and credits can both
of them make it go up, and both of them make it go down. Or leave it
completely untouched. It depends on which side of the equation they're on.

>> The only reason you do have trouble -- and pretty much
>> *everybody*has trouble, to begin with -- is that you already have
>> associations for those words. And most of those associations come from
>> the
>> income statement,
>
> I doubt that is the case for me--it isn't as if I've spent much time
> looking at income statements.

Most people haven't, in the strict sense. In the loose sense...well, an
awful lot of people seem to be aware that expenses are debits and income is
credits.

>I think it's from the broader meaning of
> the words. When you credit someone with something, you are
> metaphorically recognizing an increase in his value--evidence that he is
> an able or virtuous or whatever person. When you say an act is to his
> credit, or creditable, you are again saying that it shows goods things
> about him. "Debit" comes from a verb for "to owe," related to debt.

That, too, though I can't resist pointing out that you have a credit card
that allows you to increase your debt when you use it to pay for things.

>> Once you start thinking of it like math equations, instead of like
>> something
>> that's tied to whatever you think it should be tied to in Real Life, it's
>> not that tough to keep straight.
>
> My problem isn't with the equations, it's with the labels.

They're as arbitrary as X and Y. And they behave exactly the way arbitrary
variables in an algebraic equation do. If you have trouble remembering, you
just have to do what everybody else does with arbitrary terms: memorize
them.

Patricia C. Wrede





.

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