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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)
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.
21.
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
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
26.
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
28.
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.
30.
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
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
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
44. What about Capital and Drawings?
Capital = Credit or Debit?
Credit
Drawings = Credit or Debit?
Debit
Notice the alliteration
Capital – Credit
Drawings – Debit
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
