ACCOUNTING & FINANCEORCUTT ACADEMY HIGH SCHOOL

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Unit 3Debits and Credits

Financing

Financing is the act of getting money.Financing means where you get your money

from. Financing is the source of money.

Financing

Occurs firstCan be obtained from

the owner a lender the profit you make.

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)

The Accounting Equation

Financing occurs on the rightInvesting occurs on the left

Financing

Investing

The Accounting Equation

Every account increases on the side it is naturally on.

The Accounting Equation

Every account decreases on the opposite side.

Summary

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

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.”

WHAT IS AN ACCOUNT?DOUBLE ENTRY ACCOUNTING

DEBITS AND CREDITS

ACCOUNTING FOR STUDENTS P. 52 -53DEBITS AND CREDITS P. 1 -4

3-2 Intro to Debits and Credits

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.

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

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.

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.

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.

Debits and Credits

Traced back five hundred yearsFor 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.

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.

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.

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.

T-ACCOUNTSEXAMPLE 1EXAMPLE 2

JOURNAL ENTRIESEXAMPLE 1 EXAMPLE 2

3-3 T-Accounts and Journals

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

Cash and Notes Payable T-Accounts

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

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

Journal Entries

Another way to record transactionsLists

the date the account to be debited and the corresponding

amount the account to be credited and the corresponding

amountThe accounts to be credited are indented.

REV EN UE A CCO UNTSNORM A L BA LA NCE

CONT RA A CCOUNT SEXA M P LE 1EXA M P LE 2

DEBIT S A N D CREDIT S P.

3-5 Revenues and Gains

Revenue Accounts

Accounts: Sales Service

Revenues Interest (or

Interest Income) Gain on Sale of

Assets

Normal Balance

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

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

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

EXPENSE ACCOUNTSNORMAL BALANCE

EXAMPLE 1EXAMPLE 2

DEBITS AND CREDITS P. 9 -11

3-6 Expenses and Losses

Expense Accounts

Salaries ExpenseWages ExpenseRent ExpenseSupplies ExpenseInterest Expense

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

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

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

Example 2 cont…

Key Concepts Review

Cash To increase

Debit To decrease

Credit

Revenues/Income Credit

Expenses Debit

What about Capital and Drawings?

Capital = Credit or Debit? Credit

Drawings = Credit or Debit? Debit

Notice the alliteration Capital – Credit Drawings – Debit

Remember!

CapitalRevenuesEDIT

DrawingsExpensesBIT

GEORGE’S CATERINGRAMONA’S FLORAL SHOP

3-8 Recording Debits and Credits

DR/CR TEMPLATERAMONA’S FLORAL SHOP

4 COMPANIESGROUP QUIZ

3-9 Excel

Dr Cr Template

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))

Ramona’s Floral Shop

Open your Dr Cr TemplateSave as “Last Name Ramona’s”Record the transactions for Ramona’s Floral

Shop on your Dr Cr Excel WorksheetCheck your work and submit online

4 Companies

Open your Dr Cr TemplateSave 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.

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

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