Prepaid Credit

Now here is the interesting thing about Prepaid Credit: Its actually your asset, which means its a debit to your personal accounts.

When you make payment for a RM10 prepaid card from Maxis, you are, in essence paying the service provider (e.g. Maxis) money in advance for services (SMS, Talktime, etc..) which you will use later in the month, or week, dependin how much you use it. So by paying them in advance, Maxis actually OWES you RM10 worth of SMS, Talktime and etc... So if anyone owes you anything, that is actually an asset to you.

Why then is it called credit? Its called credit simply because, it is a credit transaction to Maxis. When Maxis owes you services, their liabilities increase (credit!). So the more you use your phone, their liability reduces, the happier they are, because they don't owe you anything anymore!

So prepaid credit is called credit because it is an increase in credit for the service provider (like Maxis) when you buy their prepaid card.

Questions for Tutorial 1 (17/5/12)

Hello my dearies, here are the questions as promised, and slides for yesterday's class

Tutorial 1
Slides for Class 4

Debit Cards and Credit Cards

Ok, in this post, I will explain some traditional notions of debit and credit, i.e. the Debit card, and the Credit card .

the DEBIT card:

First off, the debit card is your asset, and assets as we all know, are GOOD. Why is it an asset? Simply put, it is because the bank owes you money. Whenever you go to a bank, open an account and put money into that account (deposit), you are, in actual fact, loaning your money to the bank for an indefinite amount of time. Therefore when you put money into that account, you increase your assets (DEBIT).

Debits and Credits for different transactions

Ok, first off, there are essentially two categories of transactions, we have your:

1. Balance Sheet Transactions:
Assets - stuff you own, makes money for you (GOOD), etc like buildings, inventory and cash
Liabilities - stuff you owe, gives you money (GOOD) to buy assets but you have to pay it off later (BAD) like bank loans, supplies bought on credit and credit cards
Equity - your own stuff you put into your business, i.e. your investment, this creates a your share in your business. you can share your business with other people in exchange for them putting money into your business but too many shareholders can affect control of the company (UGLY).

and

2. Income Statement Transactions:
Income - Sales, rental income, investment income - basically anything that puts money in your business (which IS NOT from a loan or equity)
Expense - Salaries, Bills, rental expense, cost of materials - basically anything that takes money away from your business

To keep it really simple, just remember the following:

ASSET - increase=DEBIT, decrease = CREDIT
LIABILITY - increase=CREDIT, decrease = DEBIT
EQUITY - increase=CREDIT, decrease = DEBIT

All INCOME is CREDIT
All EXPENSE is DEBIT

For a more detailed explanation, check out the Golden equation and Debit and Credit slides in the previous post.

Of Debits Credits and whatnot

Alright, so for any discerning wannabe accountant, the most important thing you have to know is the concept of debit and credit. First off, you need to understand that debit does not mean 'IN' and credit does not mean 'OUT'. Traditional notions of credit= prepaid balance/credit card/ cash must also be forgotten!

What debit and credit really are, are just names given to describe different types of transactions ('business deals' for all you non-financially literate types, Shame on you!) . They are important because they represent the balancing function present in all modern financial accounting systems. Every business transaction is split into the debit entry and the credit entry. For example:

Chan Sam Pat buys a shiny iPhone worth RM1,999 using his cash from his wallet. 

In order to record this transaction, the discerning accountant would know that he is buying himself an asset (the iPhone) using another form of asset (his Cash), therefore increasing his fixed assets (assuming he doesn't get bored of the iPhone after 6 months of use) and decreasing his current assets (his Cash): The accounting treatment would be to:

DEBIT Fixed assets - RM1,999

CREDIT Cash - RM 1,999

So the point that i'm trying to make is this: FOR EVERY DEBIT THERE IS A CREDIT AND FOR EVERY CREDIT THERE IS A DEBIT or alternatively: FOR EVERY CREDIT THERE IS A DEBIT AND FOR EVERY DEBIT THERE IS A CREDIT.

But that is just one treatment for assets, in the next post lets take a look at other classes of transactions.

Oh, and for my KDU kiddies, here the stuff I promised you are uploaded in this post as well. Cheers!

The Golden Equation slides
Debit and Credit slides
Lesson plan for Fin. Accounting
Course Outline for Fin. Accounting