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

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Presentation on theme: "INTRODUCTION TO ACCOUNTING UNIT 5: Debits and Credits TouchText Problems and Exercises Next Debits and Credits The Trial Balance."— Presentation transcript:

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

2 NextBack Dictionary Fixing the Confusion The reason that transactions dont add up to zero is because youre not doing things the accounting way. Let me introduce you to the world of debits and credits.

3 NextBack Dictionary 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. Example: Cash (A) Debits Credits

4 BackNext Dictionary 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. Sources of Funds Revenues Liabilities Owners Equity Debit Credit For these accounts, record increases in the balance as credits. For these accounts, record decreases in the balance as debits.

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

6 BackNext Dictionary 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. Uses of Funds Assets Expenses Debit Credit For these accounts, record decreases in the balance as credits. For these accounts, record increases in the balance as debits.

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

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

9 BackNext Dictionary Remembering Debits and Credits: Cash is Key To help remember debits and credits, remember that cash is key. (Dr) Cash must be offset by … (Cr) Other Asset (example: sell securities) Revenue (example: sell something to customer) Liability (example: borrow money from bank) Owners Equity (example: new investment by owners) (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) Debit Transactions Credit Transactions

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

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

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

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

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

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

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

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

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

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

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

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

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

23 BackNext Dictionary Debits & Credits: Example Now you know why I love accounting!

24 BackNext Take Notes Dictionary 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. 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)

25 BackEnd Take Notes Dictionary End of Unit 5 Questions and Problems Transactions


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