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