INTRODUCTION TO ACCOUNTING Problems and Exercises UNIT 5: Debits and Credits TouchText Debits and Credits The Trial Balance Problems and Exercises Next

Let me introduce you to the world of debits and credits. Fixing the Confusion The reason that transactions don’t add up to zero is because you’re not doing things the “accounting way”. Dictionary Let me introduce you to the world of debits and credits. Back Next

T-Accounts: Debits and Credits Traditionally, every account was written as a “T-account”, with a left side and a right side. Debits (Dr) are recorded on the left side of the T-account. Credits (Cr) are recorded on the right side of the T-account. Dictionary Example: Cash (A) Debits Credits Back Next

Revenues, Liabilities and Owners’ Equity Sources of Funds: Revenues, Liabilities and Owners’ Equity The primary sources of funds ($$$ IN) to build and operate a business are revenues (customers), liabilities (banks, etc.) and owners’ equity (investors). These accounts increase on the right credit side of their T-accounts, and decrease on the left debit side of their T-accounts. Dictionary Sources of Funds Revenues Liabilities Owners’ Equity Debit Credit For these accounts, record decreases in the balance as debits. For these accounts, record increases in the balance as credits. Back Next

The business receives a bank loan for $1,000. Sources of Funds: Account Balance The balance of revenue, liability and owners’ equity accounts is determined by subtracting debits from credits. Example: The business receives a bank loan for $1,000. The next month, the business pays back $200 of the loan. Dictionary Bank Loan (L) Notice that there are no negative numbers. Recording a (positive) debit takes away from the account balance. $1,000 (Cr) $200 (Dr) Credit Balance = $800 (Cr) time Back Next

Uses of Funds: Assets and Expenses The primary uses of funds ($$$ OUT) in building and operating a business are purchases of assets and payments of expenses. These accounts increase on the left debit side of their T-accounts, and decrease on the right credit side of their T-accounts. Dictionary Uses of Funds Assets Expenses Debit Credit For these accounts, record increases in the balance as debits. For these accounts, record decreases in the balance as credits. Back Next

Uses of Funds: Account Balance Cash (A) Back Next The balance of asset and expense accounts is determined by subtracting credits from debits. Example: The business receives a bank loan of $1,000 cash. Then the business buys an asset for $250 cash. Dictionary Cash (A) $1,000 (Dr) $250 (Cr) Debit Balance = $750 (Dr) time Back Next

Summary of Debits and Credits Expenses Revenues Dr Cr Dr Cr Income Statement Dictionary Assets Liabilities Dr Cr Dr Cr Balance Sheet Owners’ Equity Dr Cr Asset and Expense accounts will always have a debit (Dr) balance. Revenue, Liability and Owners’ Equity accounts will always have a credit (Cr) balance. Back Next

Remembering Debits and Credits: Cash is Key To help remember debits and credits, remember that cash is key. Dictionary (Dr) Cash must be offset by … (Cr) Credit Transactions Other Asset (example: sell securities) Revenue (example: sell something to customer) Liability (example: borrow money from bank) Owners’ Equity (example: new investment by owners) Debit Transactions (Cr) Cash must be offset by … (Dr) Other Asset (example: buy inventory) Expense (example: pay salaries) Liability (example: pay back money to bank) Owners’ Equity (example: owners’ draw or dividend) Back Next

Debits & Credits: Example (update account balances) Transaction: Owner invests $10,000 into business. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Cash (A) $10,000 (Cr) Owner’s Capital (OE) $10,000 * In the Journal, the debit entry is places above and to the left of the credit entry. Back Next

Debits & Credits: Example (update account balances) Example: Pay electricity bill of $124 with cash. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Electricity (E) $124 (Cr) Cash (A) $124 Back Next

Debits & Credits: Example (update account balances) Example: Buy $1,545 of inventory (things to sell) with cash. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Inventory (A) $1,545 (Cr) Cash (A) $1,545 Back Next

Debits & Credits: Example (update account balances) Example: Do work “on credit” for a customer, who now owes you $675. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Accounts Receivable (A) $675 (Cr) Service Income (R) $675 Back Next

Debits & Credits: Example (update account balances) Example: Buy $1,267 of inventory on credit. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Inventory (A) $1,267 (Cr) Accounts Payable (L) $1,267 Back Next

Debits & Credits: Example (update account balances) Example: Borrow $16,500 cash from the bank. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Cash (A) $16,500 (Cr) Bank Loan (L) $16,500 Back Next

Debits & Credits: Example (update account balances) Example: Pay back a loan from the bank of $16,500 with cash. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Bank Loan (L) $16,500 (Cr) Cash (A) $16,500 Back Next

Debits & Credits: Example (update account balances) Example: The owner takes $2,000 cash out of the business for personal use. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Owners’ Draw (OE) (Cr) Cash (A) $2,000 As a contra equity account (see previous unit), Owner’s Draw increases on the debit side. Back Next

Debits & Credits: Example (update account balances) Example: The business pays off a $169 Account Payable with cash. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Accounts Payable (L) $169 (Cr) Cash $169 Back Next

Debits & Credits: Example (update account balances) Example: A customer pays off her $67 bill to the business with cash. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Cash (A) $67 (Cr) Accounts Receivable (A) $67 Back Next

Debits & Credits: Example (update account balances) Example: Buy $1,267 of inventory on credit. Journal (enter transactions) Ledger (update account balances) Dictionary Now Inventory (A) $1,267 Accounts Payable (L) $1,267 Now Back Next

Debits & Credits: Example (update account balances) Example: Sell $411 inventory for $675 cash. Journal (enter transactions) Ledger (update account balances) Dictionary (Dr) Cash (A) $675 (Dr) Cost of Goods Sold (E) $411 (Cr) Inventory (A) $411 (Cr) Sales (R) $675 * Note how this transaction makes sense once it is written in debits and credits. Debits ($675 + $411) = Credits (same) Back Next

Trial Balance and Pre-Closing Pre-Closing Balance Sheet Financial Statements Income Statement The Trial Balance Dictionary Pre-Closing Balance Sheet + The Trial Balance always balances, and is used frequently by accountants to check their work. Notice that $9,808 + $815 = $9,913 (same as Assets) Back Next

Debits & Credits: Example Now you know why I love accounting! Dictionary Back Next

End of Unit 5 Questions and Problems The following problems require the calculation of various statistics using MS Excel. The problems are linked to actual Excel spreadsheets, where students should do their work. Dictionary Exercise: Just as in the examples in this unit….. (a) For each transaction below, make a Journal entry and post it to the Ledger using debits and credits. Create new accounts as necessary, as you go along. Maintain account balances. (b) After the last transaction, list all account balances and place them as appropriate on the financial statements. (transactions listed next page) Take Notes Back Next

End of Unit 5 Questions and Problems Transactions Dictionary Take Notes Back End