3.debit credit
TRANSCRIPT
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Debits and Credits
By Laurie L. Swanson
PrinciplesofAccounting
HelpLesson #3
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Foundation
The prerequisite for this tutorial is a
thorough understanding of analyzing
transactions.
See Help Lesson #2 –
Analyzing Transactions
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Analyzing a Transaction
In the previous tutorial, you learned toanalyze transactions by asking thefollowing three questions:
ü W h a t accountsa re in v o lv e d in t h e t r a n sa ct io n ?ü W h a t is t h e classification o f e a ch a cco u n t ?ü W h a t ishappening t o ea ch a ccou n t —is it
increasing o r decreasing?
In this lesson, you will add a fourth
question to this list.
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Analyzing a Transaction
From this point on, when analyzing atransaction, ask yourself the following four questions.
1. W h a t accountsa re in v o lv e d in t h e t r a n sa ct io n ?2. W h a t is t he classification o f e a ch a cco u n t ?3. W h a t ishappening t o ea ch a ccou n t —is it
increasing o r decreasing?4 . How i s t h is a ccom p l ished —w i t h a debit o r credit?
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T-Accounts
Transactions can be analyzed using a toolknown as a T-account.
Cash
The account name is written at the top ofthe T. Increases and decreases are enteredon each side of the T.
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Debits and Credits:
A Definition
Debit (abbreviated
DR ) simply means theleft-hand side of anaccount and credit(abbreviated CR )means the right-handside of an account.
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Cash
CreditDebit
Debit and Credit
Identified on a T-Account
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Debit and Credit
Although debit and credit mean the left and
right sides of an account, they represent
different effects for different types of accounts.
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Increases with Debits
The Debit side of an
account represents
increases in assetaccounts, expense
accounts, and Drawing.
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Increases with Credits
The Credit side of
an account represents
increases in liabilityaccounts, revenue
accounts, and
Capital.
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Decreases with Credits
Since debits representincreases in asset
accounts, expenseaccounts, andDrawing, then creditsmust representdecreases in theseaccounts.
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Decreases with Debits
Since credits
represent increases
in liability accounts,revenue accounts,
and Capital, then
debits mustrepresent decreases
in these accounts.
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Try It
See if you can identify the increase and decreasesides of the following accounts using theT-account.
Acct Rec (Asset)Acct Pbl (Liab) Consult Fees (Rev)
Rent Exp (Exp)
DR CR DR DR
DR DR DR
M. Brady, Capital M. Brady, Drawing
CR CR CR
CR CR
+ -
+++
++
-
-
--
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Normal Balance
The increase side of an account is known as its
normal balance.
For assets, expenses, and drawing, the normal
balance is debit, while revenues, liabilities, andcapital have normal credit balances.
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Using The Transaction Analysis
Sheet
Once you understand the effect of debit and credit on
each type of account, you may use the Transaction
Analysis Sheet to analyze transactions and answer the
four questions previously discussed.
Account Classification Effect How
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Transaction Analysis Sheet
Use the Transaction Analysis Sheet
to analyze the following transactions.
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Transaction Analysis Sheet
1. Jones Career Consulting purchased
supplies for cash, $88.
Account Classification Effect How
1. Supplies
CR DecreaseAssetCash
DR IncreaseAsset
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Transaction Analysis Sheet
Account Classification Effect How
2. Accounts Pbl
CR DecreaseAssetCash
DR DecreaseLiability
2. Jones Career Consulting paid a creditor on
account, $350.
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Transaction Analysis Sheet
Account Classification Effect How
3. Accounts Rec
CR IncreaseRevenueConsulting
Income
DR IncreaseAsset
3. Jones Career Consulting provided
consulting to a client on account, $500.
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A Rule
While transactions may involve any
combination of accounts and effects, for each
transaction there must always be at least
one debit and at least one credit.
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Review the Previous Transactions
Account Classification Effect How
1. Supplies Asset Increase DR
Cash Asset Decrease CR
2. Accounts Pbl Liability Decrease DRCash Asset Decrease CR
3. Acct Rec Asset Increase DR
Consulting Income
Revenue IncreaseCR
Review the analysis of the previous transactions.
Notice the various accounts and effects recorded.
Also notice that for each transaction one debit and
one credit was entered.
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Now that you understand how to analyzetransactions with the effects of debit and credit,
you should begin to record transactions in a
General Journal.
Choose Help Lesson #4 – Recording Transactions
in a Journal.
Next Step
Accounts
Analysis
Debit/Credit
Journal