I realise this might be an extremely naive question and I am sorry if it is insulting anyone's intelligence!
I have just started using VT and I am starting a new financial year. Following the instructions for VT i have set up the opening balance under "opening balance - creditors - opening balance contra" say, at £10,000, which is all fine. So now I have cash in my Bank Account. However, I noticed that under the "Ledgers" tab, the creditors is -10,000 and then when I enter entries under payments as "Cost of Sales" say by £5,000, the creditors increased to -£15,000. I'm really confused as to why the figure grows increasingly negative? I understand that cost of sales is negative, but why would the opening balance be a negative entry?
Another thing that confuses me about VT is that when I enter Sales under Receipts, under my Net Profit tab and Ledgers Tab, the Income is in red and negative. So when I enter sales of £15,000, it comes up in red as -15,000
why is this? I would have thought it should be positive? The Cost of Sales is black and positive under the Net Profit and Ledgers tab, so at least I know it is opposite as it should be, but why is it displayed as positive?
Is this a basic accounting principle regarding debit and credit which I am totally missing? I am quite used to reading financial statements but usually Income is positive and Cost of Sales is negative!
If someone could answer my question that would be great! Sorry for the long convoluted post!!
Debits are an increase in an asset, so Cost of Sales items are debits because you've created an asset that you can sell. Credits are a reduction in an asset, so Sales items are credits because you've got rid of the item you've sold and it's no longer an asset to you. The money you pay into your bank account in exchange is a debit, because you have increased the amount of money you have, which is an asset.
Positive numbers, that also display in black, are debits. An increase in something nice! Negative numbers, that also display in red, are credits. A reduction in something nice!
So Cost of Sales are debits, and appear as positive numbers and in black, and Sales are credits, so appear as negative numbers and in red.
Presenting a set of financial statements that is full of negative numbers would be rather messy and confusing, which is why they tend to be the opposite way round, where there are usually less negative numbers, or each section is just shown with positive numbers, with the totals added or subtracted as appropriate.
Banks have got a lot to answer for in confusing people, as the statements they send their customers are a statement of the banks position with you, not your position with them. So a credit balance on the statement is an asset to you, as the bank is holding that amount of your money (so is a debit in your books), but a liability to the bank because they owe you the money (so is a credit in their books).
I hope if that didn't cause total confusion, it didn't insult anyone's intelligence! It's the way that helps me to make sense of it, and once I'm sure about whether one of the items in a transaction is a debit or credit, I do a T account (usually in my head!) to work out the rest of the double entry.
VT shows everything correctly, while other software dumbs it down!!!!!
-- Edited by EPF_Solutions on Tuesday 5th of May 2015 10:36:11 PM
