unit 3 debits and credits
TRANSCRIPT
A C C O U N T I N G & F I N A N C E
O R C U T T A C A D E M Y H I G H S C H O O L
V I E W T H E T E X T A T
W W W . A C C O U N T I N G - B A S I C S - F O R - S T U D E N T S . C O M / D O U B L E -E N T R Y - A C C O U N T I N G . H T M L
Unit 3 Debits and Credits
Financing
Financing is the act of getting money.
Financing means where you get your money from.
Financing is the source of money.
Financing
Occurs first
Can be obtained from
the owner
a lender
the profit you make
Investing
Investing is the spending of money.
One can spend money on (invest in)
things that provide only immediate benefits (expenses)
things that provide continuing benefits into the future (assets)
The Accounting Equation
Financing occurs on the right
Investing occurs on the left
Investing & Financing
Investing Financing
Occurs on the left Occurs on the right
What you spend your money on Where you get your money from
Examples Assets- Future benefits Expenses- Immediate benefits
Examples The owner (capital) Profits (income Loan
The Accounting Equation
Every account increases on the side it is naturally on.
The Accounting Equation
Every account decreases on the opposite side.
Summary
Assets and Liabilities
Assets increase on the left, thus an increase in assets is Investing
Assets decrease on the right, thus a decrease in assets is Financing
Liabilities increase on the right, thus an increase in liabilities is Financing
Liabilities decrease on the left, thus a decrease in liabilities is Investing
Owner’s Equity
Owner’s Equity is on the right side of the accounting equation.
Income is an increase in owner’s equity.
Income is considered “financing.”
Expenses decrease owner’s equity, so they increase on the left.
Expenses are considered “investing.”
W H A T I S A N A C C O U N T ?
D O U B L E E N T R Y A C C O U N T I N G
D E B I T S A N D C R E D I T S
A C C O U N T I N G F O R S T U D E N T S P . 5 2 - 5 3
D E B I T S A N D C R E D I T S P . 1 - 4
3-2 Intro to Debits and Credits
What is an account?
A record of a business transaction.
Used to sort, store, and retrieve information.
A chart of accounts is a listing of the accounts available for use.
May list as few as thirty or as many as thousands.
Balance sheet accounts are listed first, followed by the income statement accounts.
Accounts
Organized in the chart of accounts as follows:
Assets
Liabilities
Owner's (Stockholders') Equity
Revenues or Income
Expenses
Gains
Losses
Balance Sheet Accounts
Income Statement Accounts
Double Entry Accounting
Every business transaction is recorded in at least two accounts.
One account will receive a "debit" entry, meaning the amount will be entered on the left side of that account.
Another account will receive a "credit" entry, meaning the amount will be entered on the right side of that account.
Debits and Credits
Traced back five hundred years to Italy.
For every transaction, you must debit at least one account and credit at least one account.
To debit an account means to enter an amount on the left side of the account.
To credit an account means to enter an amount on the right side of an account.
Mnemonic Devices
Drawings & Debtors
Expenses
B
I
T
Capital & Creditors
Revenues
E
D
I
T
Debits and Credits
To decrease an account you do the opposite of what was done to increase the account. For example, an asset account is increased with a debit. Therefore it is decreased with a credit.
Examples of Double Entry Posters
Create a poster for your group’s assigned scenario. Include the description provided here as well as which account is debited and which account is credited. Check your answers before creating your poster. 1. When a company borrows money from a bank, the transaction will affect
the company's Bank account and the company's Loan account. 2. When the company repays a bank loan, the Bank account and the Loan
account are involved. 3. If a company buys supplies for cash, its Expenses account and its Bank
account will be affected. 4. If a company buys supplies on credit, the accounts involved are Expenses
and Creditors. 5. If a company pays the rent for the current month, Expense and Bank are
the two accounts involved. 6. If a company provides a service and gives the client an agreed upon time
period in which to pay, the company's Income account and Debtors account are affected.
7. When a client pays the amount owed from a previous transaction, the accounts Bank and Debtors are affected.
T - A C C O U N T S
E X A M P L E 1
E X A M P L E 2
J O U R N A L E N T R I E S
E X A M P L E 1
E X A M P L E 2
3-3 T-Accounts and Journals
T-Accounts
A visual aid for seeing the effect of debits and credits on a particular account.
Every transactions affects two or more accounts, so it is recorded in two or more T-accounts.
Cash and Notes Payable T-Accounts
June 1, 2012
On June 1, 2012 a company borrows $5,000 from its bank.
Asset Account: Cash/Bank
Increase by $5,000
Debit
Liability Account: Loan
Increase by $5,000
Credit
June 2, 2012
On June 2, 2012 the company repaid $2,000 of the bank loan.
Asset Account: Cash
Decrease by $2,000
Credit
Liability Account: Notes Payable
Decrease by $2,000
Debit
Journal Entries
Another way to record transactions
Lists
the date
the account to be debited and the corresponding amount
the account to be credited and the corresponding amount
The accounts to be credited are indented.
3-4 Cash
When cash is Debited Cash increases
Receive cash Cash Income
Capital
Borrow Money (loan)
When cash is Credited Cash decreases
Pay cash Expenses or equipment
Drawings
Repay loan
Create a memory device to memorize cash debits and credits A song, poem, dance, drawing, skit, acrynomn, etc…
R E V E N U E A C C O U N T S
R E V E N U E = C R E D I T
E X A M P L E 1
E X A M P L E 2
3-5 Revenues and Gains
Revenue & Gains Accounts
Accounts:
Sales
Service Revenues
Interest (or Interest Income)
Gain on Sale of Assets
Revenue = Credit
Why are revenues a credit?
Example 1
Your company performed a service and was immediately paid the full amount of $50 for the service.
Asset Account
Cash (Bank)
Debit
Revenue Account
Service revenue (Income)
Credit
Example 2
Your company performed a service on credit and invoiced the customer $400.
Asset Account
Accounts Receivable (Debtors)
Debit
Revenue Account
Service Revenues (Income)
Credit
E X P E N S E A C C O U N T S
E X P E N S E S = D E B I T
E X A M P L E 1
E X A M P L E 2
3-6 Expenses and Losses
Expense Accounts
Salaries Expense
Wages Expense
Rent Expense
Supplies Expense
Interest Expense
Advertising
Legal
Expenses = Debit
Why are expenses a debit?
Example 1
On June 1, your company paid $800 to the landlord for the June rent.
Asset Account
Cash/Bank
Credit
Expense Account
Rent Expense
Debit
Example 2
Your hourly paid employees work the last week in the year but will not be paid until the first week of the next year. At the end of the year, the company makes an entry to record the amount the employees earned, $1900, but have not been paid.
Expense Account Wages Expense
Debit
What other type of account is affected? A payable account, such as “wages payable” - liability
Credit
Example 2 cont…
N O R M A L B A L A N C E
A C C O U N T S
3-7 Normal Balance
Normal Balance
The normal balance of an account is the side of the account used to record increases.
The normal balance of an asset account is a debit balance
The normal balance of a liability account or equity account is a credit balance
Useful in detecting errors in the recording process
If an account normally have a debit balance actually has a credit balance or vice versa, an error has occurred or an unusual situation exists.
Accounts
Cash
Normal Balance: Debit
Equipment
Normal Balance: Debit
Debtors
Normal Balance: Debit
Capital/Drawings
Normal Balance: Credit
Income/Expenses
Normal Balance: Credit
Loan
Normal Balance: Credit
Creditors
Normal Balance: Credit
Normal Balance is the same as the side the account is naturally on
Contra Accounts
Accounts with balances that are the opposite of the normal balance are called contra accounts.
Sales Returns
Sales Allowances
Sales Discounts
Why would these accounts have debit balances?
They are reductions to sales
They represent a decrease in revenues
Key Concepts Review
Cash
To increase
Debit
To decrease
Credit
Revenues/Income
Credit
Expenses
Debit
What about Capital and Drawings?
Capital = Credit or Debit?
Credit
Drawings = Credit or Debit?
Debit
Notice the alliteration
Capital – Credit
Drawings – Debit
Remember!
Capital Revenues E D I T
Drawings Expenses B I T
G E O R G E ’ S C A T E R I N G
R A M O N A ’ S F L O R A L S H O P
4 C O M P A N I E S
3-8 Recording Debits and Credits
Bell’s Computers
1. Bell invested $60,000 in a computer company. Bank
Asset Increasing Debit (Dr)
Capital Credit (Cr)
2. Bought computer equipment for $7,000. Equipment
Asset Increasing Debit (Dr)
Bank Credit (Cr)
Bell’s Computers
3. Bell paid personal telephone bill from company checkbook, $200. Bank
Asset Decreasing Credit
Drawings Debit
4. Received cash for services rendered, $14,000. Bank
Asset Increasing Debit
Income Credit
Bell’s Computers
5. Billed customers for services rendered for month, $30,000. Debtors
Asset Increasing Debit
Income Credit
6. Paid current rent expense, $4,000. Bank
Asset Decreasing Credit
Expenses Debit
Bell’s Computers
7. Paid supplies expense, $1,500
Bank
Asset
Decreasing
Credit
Expenses
Debit
Totals
Balance (Dr/Cr)