Class notes for 4/27/2015

Thank you, Tony, for this review of the "Credits and Debits" presentation in class.

 

Accountants and bookkeepers record transactions as debits and credits while keeping the accounting equation constantly in balance. This process is called double-entry bookkeeping.

Debit and Credit Definitions

Business transactions are events that have  a monetary impact on the financial statements of an organization. When accounting for these transactions,  we record numbers in two accounts, where the debit  column is on the left and the credit column is on the right.

Double-entry bookkeeping records both sides of a transaction —  debits and credits —and the accounting equation remains in balance as transactions are recorded.


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Debits and Credits for Business Transactions 

 

Sale for cash: Debit the cash account & Credit the revenue account

Sale on credit: Debit the accounts receivable account & Credit the revenue account

Receive cash in payment of an account receivable: Debit the cash account & Credit the accounts receivable account

Purchase supplies from supplier for cash: Debit the supplies expense account & Credit the cash account

Purchase supplies from supplier on credit: Debit the supplies expense account & Credit the accounts payable account

Purchase inventory from supplier for cash: Debit the inventory account & Credit the cash account

Purchase inventory from supplier on credit: Debit the inventory account & Credit the accounts payable account

Pay employees: Debit the wages expense for the Gross Amount. Credit the payroll tax accounts and then credit the cash account for the Net Amount

Take out a loan: Debit cash account & Credit loans payable account

Repay a loan: Debit loans payable account & Credit cash account

Example 1:

Arnold Corporation sells a product to a customer for $1,000 in cash. This results in revenue of $1,000 and cash of $1,000. Arnold must record an increase of the cash (asset) account with a debit, and an increase of the revenue account with a credit.

Example 2:

Arnold Corporation also buys a machine for $15,000 on credit. This results in an addition to the Machinery fixed assets account with a debit, and an increase in  the accounts payable (liability) account with a credit.