Chapter 2: Debits and Credits (PDF) -...

Chapter 2: Debits and Credits

Think through and record transactions (write sentences) using T-accounts and journal entries.

Debits and Credits

Every transaction (sentence in the story of what happened to the money) has to have a debit and a credit. Accounting professionals use T-accounts to help them think through transactions and journal entries to record them.

Debits and Credits

In the pen and paper days all debit and credit transactions were recorded as journal entries. Today, computer programs like do the journal entries for you in the background.

Journal Entries & T-accounts

Debit and Credit Cheat Sheet

To use the cheat sheet you only have to figure out two things.

• Did you get or give away any money in exchange for a good or service?

• If you didn’t get or give away any money in exchange for the good or service what did you get or give away?

TOTAL DEBITS always = TOTAL CREDITS

• + and – depict how an account behaves • increases or decreases NOT positive or negative • debits and credits can be assigned to multiple

accounts • total debits in the transaction

= total credits in the transaction

Normal Balance

The type of balance, debit or credit, a particular account is expected to have based on its account type.

• debit balance: asset, expense accounts • credit balance: equity, liability, income accounts

Balance sheet account balances in QuickBooks are normally positive. Exceptions are contra accounts.

Deconstructing the Cheat Sheet Assets

Debiting an asset account increases the account balance. Crediting an asset account decreases the account balance.

Deconstructing the Cheat Sheet Liabilities & Equity

Debiting a liability or equity account decreases the account balance. Crediting a liability or equity account increases the account balance.

Deconstructing the Cheat Sheet Income (Revenue)

Debiting an income account decreases the account balance. Crediting an income account increases the account balance.

Deconstructing the Cheat Sheet Expenses & Cost of Goods Sold

Debiting an expense or COGS account increases the account balance. Crediting an expense or COGS account decreases the account balance.

Open a bank account with your parent’s money.

debit increases your bank account (current asset) balance credits increase your liability (loan) and equity balances

To record this transaction in QB make a deposit. Banking: Make Deposits

Buy tools.

debit increases your tools (fixed asset) balance credit decreases your bank account(current asset) balance

To record this transaction in QB write a check. Banking: Write Checks

Charge the tools to your credit card.

debit increases your tools (fixed asset) balance credit increases your credit card (current liability) balance

To record this transaction in QB enter a credit card charge. Banking: Enter Credit Card Charges

Pay the credit card bill.

debit decreases your credit card (current liability) balance credit decreases your bank account (current asset) balance

To record this transaction in QB write a check. Banking: Write Checks

Enter the bill from your tool vendor .

debit increases your tools (fixed asset) balance credit increases your accounts payable balance

Terms • net 30: due within 30 days • 2% 10, net 30: 2% discount if paid within

To record this transaction in QB enter a bill. Vendors: Enter Bills

Pay the tool vendor’s bill.

debit decreases your accounts payable balance credit decreases your bank account (current asset) balance

To record this transaction in QB pay the bill. Vendors: Pay Bills

Invoice a customer.

debit increases your accounts receivable balance credit increases your labor income balance

To record this transaction in QB create an invoice. Customers: Create Invoices

Receive payment from the customer.

debit increases your undeposited funds balance credit decreases your accounts receivable balance

To record this transaction in QB receive payment against the customers account. Customers: Receive Payments

Make the deposit.

debit increases your bank account (current asset) balance credit decreases your undeposited funds balance

Select the payment for deposit. Banking: Make Deposits

Unchecked amounts are undeposited funds (cash in transit).

Make the deposit. Banking: Make Deposits

• current asset

• does not become cost of goods sold until you take it off the shelves (out of inventory) and sell it to a customer

Inventory

• LIFO (last in first out): last unit purchased (added to inventory) is the first unit sold (to become COGS)

• FIFO (first in first out): first unit purchased (added to inventory) is first the unit sold (to become COGS)

• Average Cost: computed by dividing the total cost of units available for sale by the total number of units available for sale

• Standard Cost: the cost of a unit is set, any variance

from the set price is accrued (accumulated) in a variance account

Valuing Inventory:

• average cost of an item is the total cost of items currently in stock divided by the number of units of the item in stock

• recalculated every time more units of the item are purchased

• adds the cost of the new items to the cost of the old stock and then divides by the total number of new and old items

QuickBooks Average Cost Calculation:

FIFO: Enterprise Solutions Advanced Inventory

Quick Cost of Goods Sold calculation.

Beginning Inventory + Net Purchases = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold

• freight in (FOB – freight or free on board – shipping point): buyer pays

• freight out (FOB – freight or free on board – destination point): seller pays

Freight: Cost of Goods Sold

Enter the parts bill from your vendor.

debit increases your inventory (current asset) balance credit increases your accounts payable balance

To record this transaction in QB enter a bill. Vendors: Enter Bills

Inventory becomes Cost of Goods Sold when it is used on a job or sold to a customer.

debit increases your cost of goods sold balance credit decreases your inventory (current asset) balance

Selling inventory generates income.

debit increases your undeposited funds or A/R balance credit increases your materials income balance

Sell parts to a customer at the point of sale.

debit increases your undeposited funds balance credit increases your materials income account balance

To record this transaction in QB enter a sales receipt. Customers: Enter Sales Receipts

Use parts on a job.

debit increases your accounts receivable balance credit increases your materials income account balance

To record this transaction in QB create an invoice. Customers: Create Invoices

Now that you’ve gotten the idea. Practice working through some transactions on your own. Download the assignment and answer key PDF.

Chapter 2: Debits and Credits (PDF) -...

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