Unit 3 Debits and Credits
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ACCOUNTING & FINANCEORCUTT ACADEMY HIGH SCHOOL
VIEW THE TEXT AT WWW.ACCOUNTING-BASICS -FOR-STUDENTS.COM/DOUBLE-ENTRY-ACCOUNTING.HTML
Unit 3Debits and Credits
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Financing
Financing is the act of getting money.Financing means where you get your money
from. Financing is the source of money.
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Financing
Occurs firstCan be obtained from
the owner a lender the profit you make.
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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)
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The Accounting Equation
Financing occurs on the rightInvesting occurs on the left
Financing
Investing
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The Accounting Equation
Every account increases on the side it is naturally on.
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The Accounting Equation
Every account decreases on the opposite side.
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Summary
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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
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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.”
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WHAT IS AN ACCOUNT?DOUBLE ENTRY ACCOUNTING
DEBITS AND CREDITS
ACCOUNTING FOR STUDENTS P. 52 -53DEBITS AND CREDITS P. 1 -4
3-2 Intro to Debits and Credits
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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.
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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
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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.
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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.
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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.
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Debits and Credits
Traced back five hundred yearsFor 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.
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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.
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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.
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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.
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T-ACCOUNTSEXAMPLE 1EXAMPLE 2
JOURNAL ENTRIESEXAMPLE 1 EXAMPLE 2
3-3 T-Accounts and Journals
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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
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Cash and Notes Payable T-Accounts
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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
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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
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Journal Entries
Another way to record transactionsLists
the date the account to be debited and the corresponding
amount the account to be credited and the corresponding
amountThe accounts to be credited are indented.
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REV EN UE A CCO UNTSNORM A L BA LA NCE
CONT RA A CCOUNT SEXA M P LE 1EXA M P LE 2
DEBIT S A N D CREDIT S P.
3-5 Revenues and Gains
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Revenue Accounts
Accounts: Sales Service
Revenues Interest (or
Interest Income) Gain on Sale of
Assets
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Normal Balance
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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
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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
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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
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EXPENSE ACCOUNTSNORMAL BALANCE
EXAMPLE 1EXAMPLE 2
DEBITS AND CREDITS P. 9 -11
3-6 Expenses and Losses
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Expense Accounts
Salaries ExpenseWages ExpenseRent ExpenseSupplies ExpenseInterest Expense
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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
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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
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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
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Example 2 cont…
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Key Concepts Review
Cash To increase
Debit To decrease
Credit
Revenues/Income Credit
Expenses Debit
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What about Capital and Drawings?
Capital = Credit or Debit? Credit
Drawings = Credit or Debit? Debit
Notice the alliteration Capital – Credit Drawings – Debit
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Remember!
CapitalRevenuesEDIT
DrawingsExpensesBIT
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GEORGE’S CATERINGRAMONA’S FLORAL SHOP
3-8 Recording Debits and Credits
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DR/CR TEMPLATERAMONA’S FLORAL SHOP
4 COMPANIESGROUP QUIZ
3-9 Excel
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Dr Cr Template
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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))
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Ramona’s Floral Shop
Open your Dr Cr TemplateSave as “Last Name Ramona’s”Record the transactions for Ramona’s Floral
Shop on your Dr Cr Excel WorksheetCheck your work and submit online
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4 Companies
Open your Dr Cr TemplateSave 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.
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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
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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