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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

## 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

## 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

1,000
100
1,020

## 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)

1,020

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.
+

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

## KNOWLEDGE FOR ACTION

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

Assets
100

=
=

Liabilities
100

+
+

Equity
0

Journal Entry
Dr. Cash (+A)

100

100

T - accounts
Cash (A)
100
Bal. 100

## Notes Payable (L)

100
100 Bal.

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

## 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

20

20

100
80 Bal.

## Bookkeeping Examples - III

Increase an asset and decrease an asset

## Balance Sheet Equation

Assets =
10, (10) =

Liabilities
0

+
+

Equity
0

Journal Entry
Dr. Inventory (+A)

10

10

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

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

80

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

Inventory (A)
10
Bal. 10

20 100
80
80
80 Bal.
0 Bal.