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BasicAccountingTransactions

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Basic Accounting Transactions

In this lesson, we are going to learn how basic transa

through the accounting equation. What we need to r
because the accounting equation always balances,
the equation must be countered by another mov
same amount.

Now, heres what the bakerys accounts look like righ

ASSETS

LIABILITIES

Bank $20,000

Loan $9,000

Computer $1,500
Oven $2,000

OWNERS EQUITY $15,000

iPhone $500
Balance $24,000

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Balance $24,000

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BasicAccountingTransactions

As you can see, on the left side we have assets of a $20,000 in the bank, a computer which co
favourite Bakemaster X Series oven worth $2,000, and an iPhone we scored off eBay for $500
we have a single liability which is a loan from Anne at the bank for $9,000. The balance is ma
Equity of $15,000.

Notice how both the debit side and the credit side are in balance with each other, as the
$24,000.
Thats a good start.

Now its time for business. Below are some everyday transactions in the life of your bakery. L
cakes!
Transaction 1: You buy some cake mix for your store for $3,000

Purchasing our famous cake mix is like purchasing inventory. For now, we are going to classi
purchases as an expense. Hence, our expenses are going to increase. Remember, this will
increase in the debit side.

So now that expenses (CAKE MIX) has increased on the debit side, another movement is need
equation in balance. The other side of our transaction will need to be either:
An increase on the credit side
A decrease on the debit side

In this case, because we are spending cash to buy the cake mix, the movement is obviously a
bank account of $3,000.
Hence the transaction will look like:
DEBIT SIDE

CREDIT SIDE

Account

Amount

Bank (asset)

-$3,000

Cake mix (expense)

+$3,000

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Account

Amoun

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Movement

BasicAccountingTransactions

$0

Movement

$0

Notice how our debit side increased by $3,000 due to an increase in the Cake Mix Expenses.
side decreased by $3,000 because our bank account, an asset, decreased when we paid for th
result is that both entries cancel each other out and our equation stays in balance. Perfect!

Transaction 2: Anne the loan officer calls. She asks for interest of $1,000 to be paid on the lo

OK, so were dealing with an expense, which is interest. We know that expenses sit on the de
means well record interest expenses of $1,000.

To pay the interest, we took money out of the bank account, so the other side of the equation
decrease in our bank account of $1,000. Lets see how it balances.
DEBIT SIDE

CREDIT SIDE

Account

Amount

Bank

-$1,000

Interest expense

+$1,000

Movement

$0

Account

Amoun

Movement

$0

Perfect!

Now its your turn. Have a go at dragging the correct accounts and their amounts onto the co
Transaction 3:
You sell a box of cakes for $5,000.
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Hint - SALES is revenue. Revenue sits on the credit side. When you make sales, you rec
the BANK.

-5000
5000
-5000
5000
OWNER'S EQUITY
LOAN

BANK

DEBIT SIDE

Account

CREDIT SIDE

Amount

BANK

Debit Movement

SALES

5000

5000

Account
SALES

Credit Movement

5000

Perfect!
Transaction 4:
You pay your telephone bill of $300

Hint TELEPHONE bill is an expense. Expenses sit on the debit side. Paying your teleph
require money to be taken from the BANK.

-300
300
300
-300
BANK
LOAN
OWNER'S EQUITY
TELEPHONE EXPENSE
DEBIT SIDE

CREDIT SID

ACCOUNT
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ACCOUNT

AMOUNT

BANK

-300

TELEPHONE EXPENSE

300

Debit Movement

Credit Movement

Perfect!
Transaction 5:
You sell another box of cakes for $2,000

-2000
2000
-2000
2000
OWNER'S EQUITY
LOAN

BANK

DEBIT SIDE

Account

Debit Movement

CREDIT SIDE

Amount

BANK

2000

2000

SALES

Account
SALES

Credit Movement

2000

Perfect!
Transaction 6:
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Youve been playing with your bakerys Facebook page for too long and the computer overhe
repairman $50 to fix it.

Hint REPAIRS is an expense. Expenses sit on the debit side. Paying expenses requires
taken from the BANK.

-50
50
REPAIRS

50

-50

BANK

LOAN

DEBIT SIDE

ACCOUNT

CREDIT SIDE

AMOUNT

BANK

-50

REPAIRS

50

Debit Movement

OWNER'

ACCOUNT

Credit Movement

Perfect!
Transaction 7:

Its time to go on holiday. Hawaii maybe? You withdraw $1,000 from the bakerys bank accou
your ticket.

Hint When an owner withdraws money for personal reasons, this is considered DRAW
sits on the debit side.

-1000
1000
1000
-1000
OWNER'S EQUITY
Drawings
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BANK

LOAN
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BasicAccountingTransactions

DEBIT SIDE

CREDIT SID

ACCOUNT

ACCOUNT

AMOUNT

BANK

-1000

Drawings

1000

Debit Movement

Credit Movement

Perfect!
Transaction 8:

You visit Johns Car Shop to buy a delivery car. You choose the pink beetle with yellow polka d
flower in the middle. It costs $3,000. You purchase the car on credit, meaning you will pay fo
month.

Hint CAR is an asset. Assets sit on the debit side. When you purchase something on c
to debt. You owe money, which is a liability. Liabilities sit on the credit side.

-3000

3000

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-3000

3000

CAR

JOHNS CAR
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BasicAccountingTransactions

OWNER'S EQUITY

BANK

DEBIT SIDE

Account

CREDIT SIDE

Amount

CAR

Debit Movement

3000

3000

Account
JOHNS CAR SHOP

Credit Movement

3000

Perfect!

Weve just had 8 new transactions run through our business. Lets have a look at what our ac
now:

The below table is simply an expanded version of our accounting equation. Notice how on th
have assets, expenses and drawings. On the right side we have revenue, liabilities and owner
Debit side

Credit Side

Bank

$21,650

Computer

$1,500

Car

$3,000

iPhone

$500

Oven

$2,000

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Sales

$7,000

Loan

$9,000

Johns Car Shop

$3,000
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BasicAccountingTransactions

Cake mix expense

$3,000

Interest expense

$1,000

Telephone expense

$300

Repairs

$50

Drawings

$1,000

Balance

$34,000

Owners Equity

$15,000

Balance

$34,000

It can also be helpful to classify our accounts into their respective categories. For exa
asset, hence we can display it in the Assets category. Sales are a form of revenue, and hence
the Revenue category.

This allows us to split our debit side up into assets, expenses and drawings, while our credit s
liabilities, revenue and owners equity. This is very helpful when trying to monitor changes in
equation.

Lets go ahead and break down our debit and credit side into categories. As long as each acco
place, everything should stay in balance:

Debit side

Credit Side

ASSETS

REVENUE

Bank

$21,650

Computer

$1,500

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Sales

$7,000

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Car

$3,000

iPhone

$500

LIABILITIES

Oven

$2,000

Loan

$9,000

Johns Car Shop

$3,000

OWNERS EQUITY

$15,000

Balance

$34,000

EXPENSES
Cake mix expense

$3,000

Interest expense

$1,000

Telephone expense

$300

Repairs

$50

DRAWINGS

$1,000

Balance

$34,000

Still in balance? Perfect!

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