Unit 3 Debits and Credits
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This document provides an overview of accounting concepts including financing, investing, the accounting equation, debits and credits, T-accounts, and different types of accounts. It discusses how financing occurs on the right side of the accounting equation and represents sources of money, while investing occurs on the left side and represents the use of money. The key accounting equation assets = liabilities + owner's equity is also explained. Common account types are defined including assets, liabilities, owner's equity, revenues/gains, and expenses/losses. The document also demonstrates how transactions are recorded using debits and credits in T-accounts and journals.
Unit 3 Debits and Credits
- 1. Unit 3 Debits and Credits ACCOUNTING & FINANCE ORCUTT ACADEMY HIGH SCHOOL VIEW THE TEXT AT WWW.ACCOUNTING-BASICS-FOR-STUDENTS.COM/DOUBLE - ENTRY-ACCOUNTING.HTML
- 2. Financing Financing is the act of getting money. Financing means where you get your money from. Financing is the source of money.
- 3. Financing Occurs first Can be obtained from the owner a lender the profit you make.
- 4. 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)
- 5. The Accounting Equation Financing occurs on the right Investing occurs on the left
- 6. The Accounting Equation Every account increases on the side it is naturally on.
- 7. The Accounting Equation Every account decreases on the opposite side.
- 8. Summary
- 9. 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 assets is Investing
- 10. 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.”
- 11. 3-2 Intro to Debits and Credits WHAT IS AN ACCOUNT? DOUBLE ENTRY ACCOUNTING DEBITS AND CREDITS ACCOUNTING FOR STUDENTS P. 5 2 -53 DEBITS AND CREDITS P. 1 -4
- 12. What is an account? A record of a business transaction. May list as few as thirty accounts or as many as thousands. Balance sheet accounts are listed first, followed by the income statement accounts.
- 13. 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
- 14. 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.
- 15. Examples of Double Entry When a company borrows $1,000 from a bank, the transaction will affect the company's Cash account and the company's Notes Payable account. When the company repays the bank loan, the Cash account and the Notes Payable account are also involved. If a company buys supplies for cash, its Supplies account and its Cash account will be affected. If the company buys supplies on credit, the accounts involved are Supplies and Accounts Payable. If a company pays the rent for the current month, Rent Expense and Cash are the two accounts involved. If a company provides a service and gives the client 30 days in which to pay, the company's Service Revenues account and Accounts Receivable are affected.
- 16. More than two accounts An example of a transaction that involves three accounts is a company's loan payment to its bank of $300. This transaction will involve the following accounts: Cash, Notes Payable, and Interest Expense.
- 17. Debits and Credits Traced back five hundred years 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.
- 18. Debit Generally these types of accounts are increased with a debit: Dividends (Draws) Expenses Assets Losses You might think of D – E – A – L when recalling the accounts that are increased with a debit.
- 19. Credit Generally these types of accounts are increased with a credit: Gains Income Revenues Liabilities Stockholders' (Owner's) Equity You might think of G – I – R – L – S when recalling the accounts that are increased with a credit.
- 20. 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.
- 22. 3-3 T-Accounts and Journals T-ACCOUNTS EXAMPLE 1 EXAMPLE 2 JOURNAL ENTRIES EXAMPLE 1 EXAMPLE 2
- 23. 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
- 24. Cash and Notes Payable T-Accounts
- 25. Example 1 On June 1, 2012 a company borrows $5,000 from its bank. Asset Account: Cash Increase by $5,000 Debit Liability Account: Notes Payable Increase by $5,000 Credit
- 27. Example 2 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
- 29. 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.
- 31. 3-5 Revenues and Gains REVENUE ACCOUNT S NORMAL BALANCE CONTRA ACCOUNTS EXAMPLE 1 EXAMPLE 2 DEBIT S AND CREDIT S P.
- 32. Revenue Accounts Accounts: Sales Service Revenues Interest (or Interest Income) Gain on Sale of Assets
- 33. Normal Balance
- 34. 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
- 35. Example 1 Your company performed a service and was immediately paid the full amount of $50 for the service. Asset Account Cash Debit Revenue Account Service revenue Credit
- 36. Example 2 Your company performed a service on credit and invoiced the customer $400. Asset Account Accounts Receivable (Debtors) Debit Revenue Account Service Revenues Credit
- 37. 3-6 Expenses and Losses EXPENSE ACCOUNTS NORMAL BALANCE EXAMPLE 1 EXAMPLE 2 DEBITS AND CREDITS P. 9 -11
- 38. Expense Accounts Salaries Expense Wages Expense Rent Expense Supplies Expense Interest Expense
- 39. Expenses = Debit Think "debit" when expenses are incurred A debit increases the balance in an expense account A credit decreases the balance. We credit expenses only to reduce them, adjust them, or to close the expense accounts. Why are expenses a debit? They represent a DECREASE in Equity
- 40. Example 1 On June 1, your company paid $800 to the landlord for the June rent. Asset Account Cash Credit Expense Account Rent Expense Debit
- 41. 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 but have not been paid. Expense Account Wages Expense Debit What other type of account is affected? A payable account, such as “wages payable” Credit
- 42. Example 2 cont…
- 43. Key Concepts Review Cash To increase Debit To decrease Credit Revenues/Income Credit Expenses Debit
- 44. What about Capital and Drawings? Capital = Credit or Debit? Credit Drawings = Credit or Debit? Debit Notice the alliteration Capital – Credit Drawings – Debit
- 45. Remember! Capital Revenues E D I T Drawings Expenses B I T
- 46. 3-8 Recording Debits and Credits 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
- 47. 3-9 Excel DR/CR TEMPLATE R A M O N A ’ S F L O R A L S H O P 4 COMPANIES GROUP QUIZ
- 48. Dr Cr Template
- 49. IF Formula In Cell B26 =IF(B25>C25,(B25-C25)) Makes sure the balance goes into either the debits or credits column. The balance goes into whichever total is greater. This should be the “normal balance for the account. In Cell C26 =IF(C25>B25,(C25-B25)) In Cell D26 =IF(D25>E25,(D25-E25)) In Cell E26 =IF(E25>D25,(E25-D25))
- 50. Ramona’s Floral Shop Open your Dr Cr Template Save as “Last Name Ramona’s” Record the transactions for Ramona’s Floral Shop on your Dr Cr Excel Worksheet Check your work and submit online
- 51. 4 Companies Open your Dr Cr Template Save as “Last Name 4 Companies” Copy/Paste table to 4 sheets Use “Paste Special” “Keep Source Column Widths” Record the financial transactions for each company. Check your work and submit online.
- 52. Company 1: Bell’s Computer’s 1. Bell invested $60,000 in a computer company. Bank Debit Capital Credit 2. Bought computer equipment for $7,000. Equipment Debit Bank Credit 3. Bell paid personal telephone bill from company checkbook, $200. Bank Credit Drawings Debit
- 53. Company 1 cont… 4. Received cash for services rendered, $14,000. Bank Debit Income Credit 5. Billed customers for services rendered for month, $30,000. Debtors Debit Income Credit 6. Paid current rent expense, $4,000. Bank Credit Expenses Debit 7. Paid supplies expense, $1,500 Bank Credit Expenses Debit