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    Understanding Journal entries from two perspectives

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    A bank/company just opened with no assets, cash or bills.
    A company needs cash to operate and accept deposits from the public.

    When they receive the money, the company will enter the following entry:

    Cash 1,000
    John Doe deposit 100
    Mary Smith- deposit 200
    Jack Jones-deposit 700

    When you deposit money into a bank, the bank will have an increase in cash and also have created some liabilities. The liabilities are in the form that the bank owes you your money.

    When you increase a liability, you credit the account. So, the bank took your money and credited your account (a liability to them). This is how the belief started that when I receive money from the bank, they give me a credit. Its not really a credit, but actually an increase in the bank's liabilities because they have your money and they don't own it. If they don't own it, then they owe it. When a company owes somebody, it is actually a liability on the financial statement.

    Now when you use your debit card, the bank is actually paying back your money. So, the bank will record the following entry when you purchase something for $150.

    Jack Jones-deposit 150
    Cash 150

    When you use your debit account, the bank pays the store in which you bought something. So, the bank will decrease an asset by crediting cash. Now, they paid this amount on your behalf, so, they now don't owe you as much money. So, they will reduce their liability to you. When you decrease a liability, it is a actually a debit entry.

    When a store says that they will credit your account. What do they really mean? Can you provide the entry necessary to support your answer?

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    Solution Summary

    The solution compares the entries made by the bank and the individual to demonstrate both transactions and the terms used by each.