The Debit/Credit Framework

• The framework used for journals and ledger accounts was created more than 500 years ago.

• Journals are used to record the effects of each day’s transactions; organized by date.

• Ledgers are used to summarize the effects of journal entries on each account; organized by account.

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• Think of the accounting equation as a scale with assets on the left side and liabilities and shareholders’ equity on the right side.

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ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY+ ASSETS

�

Increase DecreaseUsing UsingDebit Credit

�

LIABILITIES +Decrease Increase

Using UsingDebit Credit

= SHAREHOLDERS' EQUITY +Decrease Increase

Using UsingDebit Credit

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• Accounts increase on the same side as they appear in the accounting equation.

– Assets increase on the left side– Liabilities increase on the right side– Shareholders’ equity accounts increase on

the right side

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• Left is debit (dr) and right is credit (cr)

• Use debits for increase in assets, and decreases in liabilities and shareholders’ equity accounts.

• Use credits for increases in liabilities and shareholders’ equity, and decreases in asset accounts.

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Step 2: Record• Journal entries are used to record transactions

and indicate the effects in a debits-equal-credits format.– Each journal entry includes a date– Debits appear first and credits are written below– Total debits equal total credits– Dollar signs are not used

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Date Account Title and Explanation Ref. Debit Credit20128/1 Cash 50,000

Contributed Capital 50,000 (Financing from shareholders)

General Journal

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Step 3: Summarize• Posting is the process of transferring details

of journal entries into the corresponding ledger accounts.

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Page G1

Date Account Title and Explanation Ref. Debit Credit20128/1 Cash 101 50,000

Contributed Capital 301 50,000 (Financing from stockholders)

General Journal

Account: Cash Acct. 101

Date Explanation Ref. Debit Credit Balance20128/1 G1 50,000 50,000

General Ledger

Account: Contributed Capital Acct. 301

Date Explanation Ref. Debit Credit Balance20128/1 G1 50,000 50,000

General Ledger

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• T-Accounts are a simplified version of a ledger account used for summarizing the effects of journal entries.

• Remember:– Debits are the left side of an account, or the act of

entering an amount into the left side.– Credits are the right side of an account, or the act

of entering an amount into the right side.

• The normal balance of an account is the side where increases occur.

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(a) Issue Shares to Owners Pizza Palace receives $50,000 cash

Pizza Palace gives $50,000 stock (contributed capital)

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Assets = Liabilities + Shareholders' Equity(a) Cash +$50,000 Contributed

Capital + $50,000

1 Analyze

(a) dr Cash (+A) 50,000 cr Contributed Capital (+SE) 50,000

2 Record

3 Summarize

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(b) Invest in EquipmentPizza Palace receives $42,000 equipment

Pizza Palace gives $42,000 cash

3 Summarize

2 Record(b) dr Cash (+A)Equipment (+A) 42,000 cr Cash (-A) 42,000

1 AnalyzeAssets = Liabilities + Shareholders' Equity

(b) Equipment +$42,000 Cash -$42,000

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(c) dr Cash (+A)Cash (+A) 20,000 cr Note Payable (+L) 20,000

2 Record

3 Summarize

1 AnalyzeAssets = Liabilities + Shareholders' Equity

(c) Cash + $20,000 = Note Payable + $20,000

(c) Obtain Loan from BankPizza Palace receives $20,000 cash

Pizza Palace gives $20,000 note payable to the bank

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(d) Invest in EquipmentPizza Palace receives $18,000 equipment

Pizza Palace gives $16,000 cash and a promise to pay $2,000 on account

Assets = Liabilities + Shareholders' Equity(d) Cash - $16,000 = Accounts Payable +$2,000

Equipment +$18,000

1 Analyze

3 Summarize

2 Record (d) dr Equipment (+A) 18,000 cr Cash (-A) 16,000 cr Accounts Payable (+L) 2,000

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(e) Order CookwarePizza Palace receives promise of future deliveryPizza Palace gives promise to pay for purchase

An exchange of only promises is not a transaction.No journal entry is required.

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(f) Pay SupplierPizza Palace receives a release from its promise to pay $2,000 on account

Pizza Palace gives $2,000 cash

Assets = Liabilities + Shareholders' Equity(f) Cash - $2,000 = Accounts Payable - $2,000

1 Analyze

3 Summarize

2 Record(f) dr Cash (+A)Accounts Payable (-L) 2,000 cr Cash (-A) 2,000

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(g) Receive CookwarePizza Palace receives cookware costing $630

Pizza Palace gives a promise to pay $630 on account

Assets = Liabilities + Shareholders' Equity(g) Cookware + $630 = Accounts Payable + $630

1 Analyze

(g) dr Cookware (+A) 630 cr Accounts Payable (+L) 630

2 Record

3 Summarize

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Pizza Palace’s T-Accounts

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Beg. Bal. - (a) 50,000 42,000 (b) (c) 20,000 16,000 (d)

2,000 (f) End. Bal. 10,000

Cash

Beg. Bal. - (g) 630

End. Bal. 630

Cookware

Beg. Bal. - (b) 42,000 (d) 18,000

End. Bal. 60,000

Equipment

- Beg. Bal.(f) 2,000 2,000 (d)

630 (g)630 End. Bal.

Accounts Payable

- Beg. Bal.20,000 (c)20,000 End. Bal.

Notes Payable

- Beg. Bal.50,000 (a)50,000 End. Bal.

Contributed Capital

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Trial Balance• A trial balance is an internal report that lists

all accounts and their balances, and provides a check on debits = credits.

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