Debits and Credits
Debits and credits are used to record financial transactions. Debit is the left side of an account. Credit is the right side of an account. Using the acronym DEALER helps to remember accounts with debit and credit balances. Debits must always equal credits.
- Accounts with debit balances take a debit to increase and a credit to decrease. DEA: Dividends, Expenses, and Assets
- Accounts with credit balances take a credit to increase and a debit to decrease. LER: Liabilities, Equity, and Revenue.
- In accounting, depreciation is the allocation of the cost of a fixed asset over its estimated life. Depreciation expense reduces taxable income. The most common depreciation methods are:
- straight line
- double declining balance
- sum-of-the-years digits
- In business, depreciation is a decline in the fair value of an asset. So, an investment of $50 that is now worth $40 has a price depreciation of $10 per share.
- The federal discount rate is the interest rate charged by the Federal Reserve Bank to its commercial banks and other institutions. It is less than the prime rate.
- A discount rate is the interest rate used to convert cash flows to their present value. The discount rate could be the cost of capital or the minimum required rate, also called the hurdle or cutoff rate. Converting cash flows to present value is called discounting. It is the opposite of compounding which is converting cash flows to the future value.
Dividends are distributions of earnings to stockholders. It is based on the number of shares owned. The most common type is a cash dividend. Dividends can be issued in the form of additional stock to stockholders, called a stock dividend.
Double Entry Accounting
Double entry accounting has the following basic rules:
- Every transaction affects at least two accounts with at least one debit and one credit.
- Debits must always equal credits.
- Debits and credits add or subtract from each account.
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) or “the Dow” is a price-weighted stock market index. It is composed of 30 large U.S. corporations. It was created by the Dow Jones & Company, the publisher of The Wall Street Journal in 1896.
The Dow has a long track record and is a popular index along with the S&P 500. The disadvantage of the Dow is that it only has 30 companies so it is not a broad stock index. The S&P 500 has 500 companies and it is the standard for U.S. large cap stocks.
The U.S. median net worth is $258,531 for 70-74 year olds and $272,976 for 75-79 year olds. The median net worth for individuals over 80 is $235,193.
The U.S. median net worth is $228,833 for 60-64 year olds and $271,805 for 65-69 year olds. So, the median net worth by age 70 is over $272,000.