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

Every account increases on the side it is naturally on.

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

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

Capital & Creditors

Revenues

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

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

Journal Entries

Another way to record transactions

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:

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)

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)

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

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

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

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

Normal Balance: Debit

Equipment

Debtors

Capital/Drawings

Normal Balance: Credit

Income/Expenses

Creditors

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

To increase

To decrease

Credit

Revenues/Income

Credit

Expenses

What about Capital and Drawings?

Capital = Credit or Debit?

Credit

Drawings = Credit or 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

Decreasing

Credit

Expenses

Totals

Balance (Dr/Cr)

Unit 3 Debits and Credits

Economy & Finance