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Three Fundamental Bookkeeping Equations

Assets = Liabilities + Stockholders Equity


Sum of Debits = Sum of Credits
Beginning account balance + Increases - Decreases = Ending account
balance
These equations must be in balance at all times!
The balance sheet equation can be preserved through the use of
debits and credits
Definitions of Debit and Credit:
Debit (Dr.) = Left-side Entry
Credit (Cr.) = Right-side Entry

KNOWLEDGE FOR ACTION

Debit/Credit Bookkeeping
Assets = Liabilities + Shareholders Equity
Assets = Liabilities + Contrib. Capital + Retained Earnings + Revenues Expenses
Assets + Expenses = Liabilities + Contrib. Capital + Retained Earnings + Revenues

Debits

Credits

Rules of Debits and Credits:


Every transaction must have at least one debit and at least one credit
Debits must equal credits for all transactions
No negative numbers are allowed

KNOWLEDGE FOR ACTION

Accounts and Account Balances


Normal Balance
The type of balance (debit or credit) the account carries under normal
circumstances

T Account
A record of all changes in an accounting quantity
Debits are listed on the left side of the T
Credits are listed on the right side of the T

Account Balance
Difference between sum of debits and sum of credits for the account

Change in Account Balance Equation:


Beginning Balance + Increases - Decreases = Ending Balance

KNOWLEDGE FOR ACTION

Normal Balances and T-accounts


Assets, Expenses
Normal Balance is Debit (Left side of T)
Increases through Debits (Left entries)
Decreases through Credits (Right entries)
Beginning (Debit) Balance + Debits - Credits = Ending (Debit) Balance
Accounts Receivable (A)
Beg. Balance
New Sales (Increase)
End. Balance

KNOWLEDGE FOR ACTION

1,000
100
1,020

80 Cash Collections (Decrease)

Normal Balances and T-accounts


Liabilities, Stockholders' Equity, Revenues
Normal Balance is Credit (Right side of T)
Decreases through Debits (Left entries)
Increases through Credits (Right entries)
Beginning (Credit) Balance + Credits - Debits = Ending (Credit) Balance

Accounts Payable (L)


1,000
Cash Payments (Decrease)

80 100 New Purchases (Increase)


1,020

KNOWLEDGE FOR ACTION

Beg. Balance

End. Balance

Super T-account
Assets
Assets
Dr.
+

Cr.
-

Liabilities & Stockholders Equity


Liabilities
Dr.
-

Cr.
+

Contributed
Capital
Dr.
-

Cr.
+

Retained Earnings
Dr.
-

Cr.
+

Expenses

Dr.
+

KNOWLEDGE FOR ACTION

Cr.
-

Revenues

Dr.
-

Cr.
+

Analyzing Transactions & Journal Entries


Three questions in analyzing transactions
Which specific asset, liability, stockholders' equity, revenue or expense accounts
does the transaction affect?
Does the transaction increase or decrease the affected accounts?
Should the accounts be debited or credited?

Journal entry format


Dr. <Name of Account Debited> $XXX
Cr. <Name of Account Credited> $XXX

Always list Debits first and always indent Credits

KNOWLEDGE FOR ACTION

Bookkeeping Examples - I
Increase an asset and increase a liability or equity

Receive $100 cash from a bank loan

Balance Sheet Equation


Assets
100

=
=

Liabilities
100

+
+

Equity
0

Journal Entry
Dr. Cash (+A)

100

Cr. Notes Payable (+L)

100

T - accounts
Cash (A)
100
Bal. 100

KNOWLEDGE FOR ACTION

Notes Payable (L)


100
100 Bal.

Bookkeeping Examples - II
Decrease an asset and decrease a liability or equity

Repay $20 of a bank loan

Balance Sheet Equation


Assets
(20)

=
=

Liabilities
(20)

+
+

Equity
0

Journal Entry
Dr. Notes Payable (-L) 20
Cr. Cash (-A)

20

T - accounts
Cash (A)
100
Bal. 80

KNOWLEDGE FOR ACTION

20

Notes Payable (L)


20

100
80 Bal.

Bookkeeping Examples - III


Increase an asset and decrease an asset

Pay $10 in cash for inventory

Balance Sheet Equation


Assets =
10, (10) =

Liabilities
0

+
+

Equity
0

Journal Entry
Dr. Inventory (+A)

10

Cr. Cash (-A)

10

T - accounts
Cash (A)
100 20
10
Bal. 70

KNOWLEDGE FOR ACTION

Inventory (A)
10
Bal. 10

Notes Payable (L)


20 100
80 Bal.

Bookkeeping Examples - IV
Increase a liability or equity and decrease another liability or equity
Issue $80 in Common Stock to pay off the bank loan

Balance Sheet Equation


Assets
0

=
=

Liabilities
(80)

+
+

Equity
80

Journal Entry
Dr. Notes Payable (-L)

80

Cr. Common Stock (+SE)

80

T - accounts
Cash (A)
100 20
10
Bal. 70

Inventory (A)
10
Bal. 10

KNOWLEDGE FOR ACTION

Notes Payable (L) Common Stock (SE)


20 100
80
80
80 Bal.
0 Bal.