Introduction to Accounting Introduction to Accounting 120120Chapter 4

Debit and Credit Review

Assignment #2 - U4A2

Monday, April 12,2010

In Today’s ClassIn Today’s Class

•REMINDER:•U4A1.doc assignment is now overdue.

•Review Debit and Credit•Assignment #2 (U4A2.doc)

Moving On… Debit and Moving On… Debit and CreditCredit

•  Knowing that every account page has two distinct sides (left and right) is necessary for understanding the theory of accounting.

• In accounting, these sides are termed debit (left side) and credit (right side). 

Moving On… Debit and Moving On… Debit and CreditCredit

• Remember how the opening balances for assets were placed on the left side and the opening balances for liabilities and owner's equity were placed on the right side? We can now state:

• "Asset accounts have debit values.“• "Liability and Owner's Equity

accounts have credit values."

Rules of Debit and CreditRules of Debit and Credit

• Now that you understand that the left side of the account is the debit side and the right side of the account is the credit side, we can examine how changes to accounts are recorded.

• The rules are fairly basic:

Rules of Debit and CreditRules of Debit and Credit

• Accounts increase on the same side as their opening balance and decrease on the opposing side:

Applying the Rules of Debit Applying the Rules of Debit and Creditand Credit

• Transaction analysis is vital to good and proper accounting. To further understand the rules of debit and credit, we will practice analyzing the transactions of Atlantic Fleet Company.

• Previously, transactions were analyzed using an equation analysis sheet. The equation analysis sheet does not incorporate the concept of debit and credit. The transaction analysis sheet is used to learn this accounting theory. Once the theory is mastered, the transaction analysis sheet becomes unnecessary.

The Transaction Analysis The Transaction Analysis SheetSheet

• Review the headings and information recorded on a transaction analysis sheet. The transaction analysis sheet is not a formal document; therefore, abbreviations are acceptable.

  Transaction 1Transaction 1

• Examine the following transactions, paying particular attention to how the entries are analyzed on the transaction sheet.

• Atlantic Fleet issues a cheque for $1 000 to Ramon Products, in partial payment of the debt owed.

  Transaction 1 - StepsTransaction 1 - Steps

In the first column, record the names of the accounts affected by the transaction.

1. In the second column, classify the individual accounts as Asset, Liability or Owner's Equity.

2. In the third column, record whether the accounts are to increase or decrease.

3. In the fourth column, record whether the accounts are to be debited or credited.

• In the fifth column, record the amounts by which the accounts are increased or decreased. It is not necessary to use "+" or "-" signs.

Transaction 1 - Transfer to T-Transaction 1 - Transfer to T-AccountsAccounts

• Observe the transfer from the transaction analysis sheet to the T-Accounts.

• Opening account balances are displayed in blue. The circled number indicates the transaction number. T-Accounts are not formal; thus, account name abbreviations are acceptable.

Transaction 2Transaction 2

• Charles Stanson invests an additional $10 000 cash into the business.

• Examine the effect of this transaction, using T-Accounts. Notice in the Bank account, there are now two entries in addition to the opening balance; both the debit and credit sides of the Bank T-Account have been utilized.

  Transaction 3Transaction 3

• A delivery service is provided for a customer. The customer pays $500 cash, in full payment.

  Transaction 4Transaction 4

• A used truck is purchased from Drake Company for $10 000. A $1 000 down payment is made. The owner contributes $5 000 of his personal funds towards the purchase, and the remaining balance is financed through the bank.

Transaction 4 (Continued)Transaction 4 (Continued)

• There are a couple additional things to note at this point:1. For each transaction, the account(s) debited is

listed before the account(s) credited. This is a common accounting practice and will become mandatory later.

2. Each transaction balances within itself, meaning debit amounts equal credit amounts. This ensures the fundamental accounting equation remains balanced.

Transaction 5Transaction 5

• A truck costing $8 000 is sold for $5 000 cash.

Transaction 6Transaction 6

• A delivery service is completed for K. Munro, at a price of $200. Monroe does not pay for the service at the time it is provided. She agrees to pay in 60 days.

A/R K. Munro is a new customer. She does not have an opening balance.

  Transaction 7Transaction 7

• Four company trucks are inspected and serviced. The company pays $350, in full payment.

  Let's ReviewLet's Review

• Re-examine the completed transaction analysis sheet.

  Let's ReviewLet's Review

• Did you remember that when a transaction occurs, at least two accounts are affected?

• Did you remember that for each transaction, the sum of debit entries always equals the sum of credit entries? This is known as double entry accounting.

• Double Entry Accounting means at least two accounts are affected in every transaction and the debit entries must equal the credit entries.

• Finally, did you remember that for each transaction, the debits are listed first?

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