accounting for transactions. transactions a business transaction is an event that occurs that...
TRANSCRIPT
Accounting for Transactions
Transactions
• A business transaction is an event that occurs that changes the financial position of a business. These may happen on a daily basis within a business.
Transactions
• The first rule of transactions– Every transaction will affect 2 accounts• Think of any purchase you make – you trade cash for
_______. (2 accounts affected)• A long time ago – trade furs for building supplies (2
accounts affected)
– An economic ‘give’ and ‘take’ associated with the operation of a business.
Transaction Examples
1) Paid cash for supplies2) Paid $ owed to a creditor3) Received $ from a debtor4) Owner invests $ into the business
Transactions
• Steps in recording transactions1. Determine which accounts are affected by the
transaction. (A,L,OE,R,E)2. How much do the accounts change.3. Decide whether the change is an increase or
decrease in the account.4. Is the Equation still in Balance.
WHAT IS DEBIT AND CREDIT?
DEBIT AND CREDIT
• Debits and Credits are the accounting terminologies which are used to describe the increase or decrease in financial accounts
• Any movement in an account can be specified as debits or credits
• DO NOT make the mistake of thinking debit means increase and credit means decrease– Debit and Credit means different a different thing
to different accounts
Debit and Credit
• We have a variety of accounts– Some are called debit accounts• This means that to increase the account we will debit it
– The others are called credit accounts• Has to be one or the other• To increase these accounts you will
credit it
• FOR EVERY TRANSACTION – DEBITS MUST EQUAL CREDITS (BALANCED!)
Debit and Credit
• T- Accounts– Using T-Accounts to show the increase and
decrease of individual accounts• The left represents a debit• The right represents a credit• ALWAYS THE SAME FOR EACH ACCOUNT
Debit and Credit
• We will start with our B/S accounts– Assets– Liabilities– Owner’s Equity
• Remember the accounting equation
Debit and Credit
• The left side of the equation is the left side of our T-Account– Assets are debit accounts– To increase an asset’s total, we must debit it– Also appear on the left side of the Balance Sheet
• The right side of the equation is the right side of our T-Account– Liabilities and Owner’s Equity are credit accounts– To increase the totals, we must credit them
Debit and Credit
• Income Statement Accounts– Revenues– Expenses
• Think of these accounts in terms of owner’s equity– Which of the two add to the value of our business?
• We would credit that amount because Owner’s Equity is a credit account
– Other way around if taking away from the value of the business
• Revenues– Credit Accounts– Remember: Debit doesn’t mean good and Credit
doesn’t mean bad
• Expenses– Takes away from the value of our business– Therefore, is a debit account
Debit and Credit
• A trick I use to remember• Think of a debit card vs. a credit card• Debit Card – Taking from your cash in the
bank (ASSETS)• Credit Card – Borrowing money with the
promise of future payment. (Liability)
Debit Credit
Assets
Expenses
Liabilities
Owner’s Equity
Revenue
T - Account
• Drawing a T – separates the debit side of an account from the credit side
T - Account
ASSETS
DEBIT CREDIT
Will Increase the value of the asset account
Ex. Receiving a building
Will Decrease the Value of the asset account
Ex. Paying out cash
Liability
DEBIT CREDIT
Will Decrease the Value of the Liability
Ex. Paying off a creditor
Will Increase the Value of the Laibility
Ex. Taking on more of a loan
OWNER’S EQUITY
DEBIT CREDIT
Will decrease the Worth of the business
Ex. Employee steals cash from the register
Will Increase the Worth Of the Business
Ex. Initial Investment in the Business
REVENUE
DEBIT CREDIT
Will decrease the amount of revenue received
- Rarely Happens
Ex. Giving back money made -returns & refunds
Will Increase the amount of Revenue made
Ex. Making a sale
EXPENSE
DEBIT CREDIT
Will increase the amount of expense
Ex. Paying Rent
Will decrease the amount of the expense
-Rarely Happens
Ex. Getting a refund or rebate
Recording Transactions
• Example 1: Paid back a loan owing for $500.
• What 2 accounts are affected?– Which account is debited?– Which account is credited?
Recording Transactions
• Example 1: Paid back a loan owing for $500.
Cash (asset) Loan (Liability)
$500 $500
Recording Transactions
• Example 2: Was paid $330 for services performed.
• What accounts are affected?– Debit?– Credit?
Recording Transactions
• Example 2: Was paid $330 for services performed.
Cash (asset) Service Revenue
$330 $330
Recording Transactions
• Example 3: The Owner invests $5000 of his own money in the business
• Which accounts are affected?– Debit?– Credit?
Recording Transactions
• Example 3: The Owner invests $5000 of his own money in the business
Cash (asset) Owner’s Equity
$5000 $5000
PRACTICE MAKES PERFECT!
• Complete Transaction Handout using the T-Accounts provided
ACCOUNT TO INCREASE TO DECREASEAssets Debit Credit
Liabilities Credit Debit
Capital Credit Debit
Revenues Credit Debit
Expenses Debit Credit