Introduction to Accounting Preparing for a User’s Perspective What are debits and credits? Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store

Typical Ledger Account Debits in $ Credits in $ This is a T Account. T-Accounts are used to represent a company’s account ledgers. Accountants use ledgers to keep track of each individual account’s balance in $. Ledgers simplify math because all increases are on one side and all decreases are on the other side. Entries on the LEFT are called DEBITs. DEBIT is just another word for LEFT. Entries on the RIGHT are called CREDITS. CREDIT is just another word for RIGHT. Some accounts + INCREASE with DEBITS, and others + INCREASE with CREDITS.

+ - - + - + = + ASSETS LIABILITIES EQUITY This is the balance sheet equation. Assets are on the DEBIT (i.e. left) side of the balance sheet equation; therefore, ASSETS accounts are INCREASED by DEBIT entries. LIABILITIES and EQUITY are on the CREDIT (i.e. right) side of the balance sheet equation; therefore, LIABILITY and EQUITY accounts are INCREASED by CREDIT entries. - DECREASES are always recorded on the opposite side of an account’s INCREASE side.

CAPITAL CONTRIBUTIONS ASSETS = LIABILITIES + + - - EQUITY + - + Here is the basic accounting equation expanded to show the two key equity financing sources: Capital Contributions and Retained Earnings. CAPITAL CONTRIBUTIONS + Whenever ANY Equity account is CREDITED, TOTAL EQUITY will INCREASE. - RETAINED EARNINGS + - + Whenever ANY Equity account is DEBITED, TOTAL EQUITY will DECREASE. Example: When Expenses are DEBITED what happens to Total Equity? Hint: Follow the arrows. - NET INCOME - DIVIDENDS + + - Expenses would INCREASE, but, Net Income, Retained Earnings and Total Equity will all DECREASE. - Example: What if Revenues were CREDITED? REVENUES EXPENSES - + + - Revenues would INCREASE, and Net Income, Retained Earnings and Total Equity will all INCREASE.

INCREASE & DECREASE Rules By Account Debits Credits + - ASSETS - + LIABILITIES - + EQUITY: - + CAPITAL CONTRIBUTIONS - + RETAINED EARNINGS - + NET INCOME - + REVENUES & GAINS + - EXPENSES & LOSSES + - DIVIDENDS

CAPITAL CONTRIBUTIONS ASSETS = LIABILITIES + + - - EQUITY + - + - Gross Assets Contra Assets CAPITAL CONTRIBUTIONS + + - - + - RETAINED EARNINGS + - + This is what I call the “super expanded accounting equation” because it includes the rules for all account categories in my introduction to accounting course. - NET INCOME DIVIDENDS - + + - It includes contra assets such as: Allowance for bad debts Accumulated depreciation - - REVENUES EXPENSES And contra revenues such as: Sales discounts Sales returns and allowances Contra Revenues - + + - + -

INCREASE & DECREASE Rules By Account Debits Credits INCREASE & DECREASE Rules By Account + - ASSETS - + CONTRA ASSETS - + LIABILITIES - + EQUITY: - + CAPITAL CONTRIBUTIONS - + RETAINED EARNINGS - + NET INCOME - + REVENUES & GAINS + - EXPENSES & LOSSES + - CONTRA REVENUES + - DIVIDENDS

Common Asset Accounts Debits Credits Cash + - Accounts receivable Inventory Office supplies Prepaid insurance Prepaid rent Notes receivable (5 year) Warehouse equipment Land Patents Trademarks Copyrights Goodwill

Common Contra Asset Accounts Debits Credits Allowance for doubtful accounts - + Accumulated depreciation

Common Liability Accounts Debits Credits Accounts payable - + Salaries and wages payable Income taxes payable Dividends payable Interest payable Unearned sales revenue Utilities payable Notes payable Mortgages payable Bonds payable

Common Equity Accounts Debits Credits Kevin Kimball, Capital - + Teresa Kimball, Capital Common Stock Preferred Stock Retained Earnings Capital distributions Withdrawals Dividends Revenues Gains Expenses Losses These permanent equity accounts keep a permanent running total of the company’s total equity and are not closed. Appear on the Balance Sheet Appear on the Stmt of Owners’ Equity or Stmt of Shareholders’ Equity These nominal equity accounts are only temporarily used during a given period and are closed into retained earnings. Appear on the Income Statement

Common Revenue and Gain Accounts Debits Credits Sales Revenue - + Rent Revenue Interest Revenue Gain on Sale

Common Expense and Loss Accounts Debits Credits Cost of Goods Sold + - Advertising Expense Delivery Expense Postage Expense Salaries & Wages Expense Rent Expense Utilities Expense Office Supplies Expense Bad Debt Expense Insurance Expense Interest Expense Income Tax Expense Loss on Sale

Introduction to Accounting Preparing for a User’s Perspective What are debits and credits? Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store