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 supplies 2)Paid $ owed to a creditor 3)Received $ from a debtor 4)Owner invests $ into the business

Transactions Steps in recording transactions 1.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)

DebitCredit 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 DEBITCREDIT 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 DEBITCREDIT 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 DEBITCREDIT 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 DEBITCREDIT 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 DEBITCREDIT 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

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

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

PRACTICE MAKES PERFECT! Complete Transaction Handout using the T- Accounts provided ACCOUNTTO INCREASETO DECREASE AssetsDebitCredit LiabilitiesCreditDebit CapitalCreditDebit RevenuesCreditDebit ExpensesDebitCredit