ACC Notes

Introduction to Debits and Credits
When to Use a Debit or Credit in a Journal Entry

One of the most difficult things to get a handle on when setting up your books is
when to use a debit and when to use a credit. Here are some simple rules. If you
will follow these rules, it will make your accounting life a lot easier.
You will always use both a debit and a credit for every journal entry. That
is what the system of double-entry bookkeeping is based on. You have
two columns in your journal entry. Each will have an equal entry one
for a debit, one for a credit.
Remember the format of the Accounting Equation where Assets =

Liabilities + Owners Equity. The Asset side is the left side of the equation
and the Liabilities + Owner's Equity is the right side of the equation.
When you need to make a journal entry, refer to your Chart of Accountsto
see if the account you need to use falls on the left or right side of
the accounting equation.
If the account is on the Asset or left side, that is the Debit side. A debit
will increase those accounts and a credit will decrease them. If the
account is on the Liabilities and Owner's Equity or right side, that is
the Credit side. A credit will increase those accounts and a debit will
decrease them
Example
Company A was incorporated on January 1, 2010 with an initial capital of 5,000 shares of
common stock having $20 par value. During the first month of its operations, the company
engaged in following transactions:
Dat Transaction
e
Jan An amount of $36,000 was paid as advance rent for three months.
2
Jan Paid $60,000 cash on the purchase of equipment costing $80,000. The
3 remaining amount was recognized as a one year note payable with
interest rate of 9%.
Jan Purchased office supplies costing $17,600 on account.

4
Jan Provided services to its customers and received $28,500 in cash.

13
Jan Paid the accounts payable on the office supplies purchased on January 4.
13
Jan Paid wages to its employees for first two weeks of January, aggregating
14 $19,100.
Jan Provided $54,100 worth of services to its customers. They paid $32,900
18 and promised to pay the remaining amount.
Jan Received $15,300 from customers for the services provided on January
23 18.
Jan Received $4,000 as an advance payment from customers.

25
Jan Purchased office supplies costing $5,200 on account.

26
Jan Paid wages to its employees for the third and fourth week of January:
28 $19,100.
Jan Paid $5,000 as dividends.

31
Jan Received electricity bill of $2,470.

31
Jan Received telephone bill of $1,494.
31
Jan Miscellaneous expenses paid during the month totaled $3,470

31
The following table shows the journal entries for the above events.
Date Account Debit Credit
Jan 1 Cash 100,000
Common Stock 100,000
Jan 2 Prepaid Rent 36,000
Cash 36,000
Jan 3 Equipment 80,000
Cash 60,000
Notes Payable 20,000
Jan 4 Office Supplies 17,600
Accounts Payable 17,600
Jan 13 Cash 28,500
Service Revenue 28,500
Jan 13 Accounts Payable 17,600
Cash 17,600
Jan 14 Wages Expense 19,100
Cash 19,100
Jan 18 Cash 32,900
Accounts Receivable 21,200

Jan 23 Cash 15,300
Jan 25 Cash 4,000
Unearned Revenue 4,000
Jan 26 Office Supplies 5,200
Jan 28 Wages Expense 19,100
Cash 19,100
Jan 31 Dividends 5,000
Cash 5,000
Jan 31 Electricity Expense 2,470
Utilities Payable 2,470
Jan 31 Telephone Expense 1,494
Jan 31 Miscellaneous Expense 3,470
Cash 3,470
At the end of the period, all the journal for the period are posted to the ledger accounts.
Jane and Bob open their brand new store selling thingamajigs. They
invest $15,000 into their new business; rent a building, and start selling
their merchandise.
Examples of their accounting journal entries for the first month:
Date Account Names & Explanation Debit Credit
3/1 Cash 15000
Capital 15000
Jane and Bob deposit $15,000 in their new business

bank account.
Debit: increase in asset (cash)
Credit: increase in owners equity
3/5 Rent Expense 1700

Cash 1700
Paid first month's rent of $1700.
Debit: increase in expenses (rent)
Credit: decrease in asset (cash)
3/10 Thingamajig Material - Inventory 4000
Accounts Payable 4000
To make their thingamajigs Jane purchased $4000 in

thingamajig materials on credit.
Debit: increase in assets (inventory)
Credit: increase in liabilities (AP)
3/15 Cash 1200
Account Receivable 1000
Revenue 2200
Sales of $2200. Cash sales of $1200 and sold $1000

on customer credit. (Compound entry: Some
transactions will affect more than one account)
Debit: increase in assets (cash)
Debit: increase in assets (AR)
Credit: increase in Revenue
Thingamajig Material Expense 600

3/15
Thingamajig Material - Inventory 600
$600 in Thingamajig material was used to make more

Thingamajigs.
Debit: increase in expenses (Thingamajig Material)
Credit: decrease in asset (inventory)
3/28 Accounts Payable 1800
Cash 1800
Paid $1800 on credit account.
Debit: decrease in liabilities (AP)
Credit: decrease in assets (cash)
3/30 Cash 500
Accounts Receivable 500
Collected $500 in cash from credit customers.
Debit: increase in assets (cash)
Credit: decrease in asset (AR)

Journal Entries to Ledger Accounts
The second step of accounting cycle is to post the journal entries to the ledger accounts.
The journal entries recorded during the first step provide information about which accounts are to be
debited and which to be credited and also the magnitude of the debit or credit (see debit-credit-rules).
The debit and credit values of journal entries are transferred to ledger accounts one by one in such a
way that debit amount of a journal entry is transferred to the debit side of the relevant ledger account
and the credit amount is transferred to the credit side of the relevant ledger account.
After posting all the journal entries, the balance of each account is calculated. The balance of an asset,
expense, contra-liability and contra-equity account is calculated by subtracting the sum of its credit
side from the sum of its debit side. The balance of a liability, equity and contra-asset account is
calculated the opposite way i.e. by subtracting the sum of its debit side from the sum of its credit side .
Example
The ledger accounts shown below are derived from the journal entries of Company A.
Asset Accounts
Cash Accounts Receivable
$100,0 $36,00 $21,20 $15,30

00 0 0 0
28,500 60,000
32,900 17,600
15,300 19,100
4,000 19,100
5,000
3,470
$20,43 $5,900
0
Office Supplies Prepaid Rent
$17,60 $36,00
0 0
5,200
$22,80 $36,00
0 0
Equipment
$80,00
0
$80,00
0
Liability Accounts
Accounts Payable Notes Payable
$17,600 $17,600 $20,000
5,200
$5,200 $20,000
Utilities Payable Unearned Revenue
$2,470 $4,000
1,494
$3,964 $4,000
Equity Accounts
Common Stock
$100,000
$100,000
Revenue, Dividend and Expense Accounts

Service Revenue Dividend
$28,500 $5,000
54,100
$82,600 $5,000
Wages Expense Miscellaneous Expense
$19,100 $3,470
19,100
$38,200 $3,470
Electricity Expense Telephone Expense
$2,470 $1,494
$2,470 $1,494
The ledger accounts step of accounting cycle completes here. The next step is the preparation of unadjusted trial
balance.
Unadjusted Trial Balance
A trial balance is a list of the balances of ledger accounts of a business at a specific point of time usually
at the end of a period such as month, quarter or year.
An unadjusted trial balance is the one which is created before any adjustments are made in the ledger
accounts.
The preparation of a trial balance is very simple. All we have to do is to list the balances of the ledger
accounts of a business.
Example
Unadjusted Trial Balance

January 31, 2010
Debit Credit
Cash $20,430
Office Supplies 22,800

Prepaid Rent 36,000
Equipment 80,000
Accounts Payable $5,200
Wages Expense 38,200
Miscellaneous Expense 3,470
Electricity Expense 2,470
Telephone Expense 1,494
Dividend 5,000
Total $215,764 $215,764
Since, in double entry accounting we record each transaction with two aspects, therefore
the total of debit and credit balances of the trial balance are always equal. Any difference
shall indicate some mistake in the recording process or in the calculations. Although each
unbalanced trial balance indicates mistake, but this does not mean that all errors cause the
trial balance to unbalance. There are few types of mistakes which will not unbalance the trial
balance and they may escape un-noticed if we do not review our work carefully. For
example, to omit an entry, to record a transaction twice, etc.
After the preparation of an unadjusted trial balance, adjusting entries are passed.
Adjusting Entries
Adjusting entries are journal entries recorded at the end of an accounting period to adjust
income and expense accounts so that they comply with the accrual concept of accounting.
Their main purpose is to match incomes and expenses to appropriate accounting periods.
The transactions which are recorded using adjusting entries are not spontaneous but are
spread over a period of time. Not all journal entries recorded at the end of
an accounting period are adjusting entries. For example, an entry to record a purchase on
the last day of a period is not an adjusting entry. An adjusting entry always involves either
income or expense account.
Types
There are following types of adjusting entries:
Accruals:
These include revenues not yet received nor recorded and expenses not yet paid nor
recorded. For example, interest expense on loan accrued in the current period but not yet
paid.
Prepayments:
These are revenues received in advance and recorded as liabilities, to be recorded as
revenue and expenses paid in advance and recorded as assets, to be recorded as expense.
For example, adjustments to unearned revenue, prepaid insurance, office supplies, prepaid
rent, etc.
Non-cash:
These adjusting entries record non-cash items such as depreciation expense, allowance for
doubtful debts etc.
Example
This example is a continuation of the accounting cycle problem we have been working on. In
the previous step we prepared an unadjusted trial balance. Here we will pass adjusting
entries.
Relevant information for the preparation of adjusting entries of Company A
Office supplies having original cost $4,320 were unused till the end of the period.
Office supplies having original cost of $22,800 are shown on unadjusted trial
balance.
Prepaid rent of $36,000 was paid for the months January, February and March.
Relevant information for the preparation of adjusting entries of Company A
The equipment costing $80,000 has useful life of 5 years and its estimated
salvage value is $14,000. Depreciation is provided using the straight line
depreciation method.
The interest rate on $20,000 note payable is 9%. Accrue the interest for one
month.
$3,000 worth of service has been provided to the customer who paid advance
amount of $4,000.
The adjusting entries of Company A are:
Jan Supplies Expense 18,48

31 0

0
Supplies Expense = $22,800 $4,320 = $18,480
Jan Rent Expense 12,00

31 0
Prepaid Rent 12,00

0
Rent Expense = $36,000 3 = $12,000
Jan Depreciation Expense 1,100

31
Accumulated 1,100
Depreciation
Depreciation Expense = ($80,000 $14,000) (5 12) = $1,100
Jan Interest Expense 150

31
Interest Payable 150
Interest Expense = $20,000 (9% 12) = $150
Jan Unearned Revenue 3,000

31
An adjusted trial balance is prepared in the next step of accounting cycle.
Adjusted Trial Balance

An Adjusted Trial Balance is a list of the balances of ledger accounts which is created after
the preparation of adjusting entries. Adjusted trial balance contains balances of revenues
and expenses along with those of assets, liabilities and equities. Adjusted trial balance can
be used directly in the preparation of the statement of changes in stockholders' equity,
income statement and the balance sheet. However it does not provide enough information
for the preparation of the statement of cash flows.
The format of an adjusted trial balance is same as that of unadjusted trial balance.
Example
The following adjusted trial balance was prepared after posting the adjusting entries of
Company A to its general ledger and calculating new account balances:
Company A
January 31, 2010
Debit Credit
Cash $20,430
Prepaid Rent 24,000
Equipment 80,000
Company A
January 31, 2010
Accumulated Depreciation $1,100
Supplies Expense 18,480
Rent Expense 12,000
Depreciation Expense 1,100
Interest Expense 150
Dividend 5,000
Total $217,014 $217,014
The totals of an adjusted trial balance must be equal. Any difference indicates that there is
some error in the journal entries or in the ledger or in the calculations.
The next step of accounting cycle is the preparation of closing entries.

Financial Statement
Income Statement
Income statement (also referred to as (a) statement of income and expense or
(b) statement of profit or loss or (c) profit and loss account) is a financial statement that summaries
the results of a companys operations for a period. It presents a picture of a
companys revenues, expenses, gains, losses, net income and earnings per share (EPS).
Together with balance sheet, statement of cash flows and statement of changes in shareholders
equity, income statement forms a complete set of financial statements.
Format
A typical income statement is in report form. The header identifies the company, the statement and
the period to which the statement relates, the reporting currency and the level of rounding-off. The
header is followed by revenue and cost of goods sold and calculation of gross profit. Further down
the statement there is detail of operating expenses, non-operating expenses, and taxes and eventually
the statement presents net income differentiating between income earned from continuing operations
and total net income. In case of a consolidated income statement, a distribution of
net income between the equity-holders of the parent and non-controlling interest holders is also
presented. The statement normally ends with a presentation of earnings per share, both basic and
diluted. Important line items such as revenue, cost of sales, etc. are cross-referred to the relevant
detailed schedules and notes.
Types
There are two types of income statements: single-step income statement, in which there are no sub-
totals such as gross profit, operating income, earnings before taxes, etc.; and multi-step income
statement, in which similar expenses are grouped together and intermediate figures such as
gross profit, operating income, EBIT, etc. are calculated.
Another classification of income statement depends on whether the expenses are grouped by their
nature or function. Income statement by nature classifies expenses according to their nature i.e.
without allocating them to different business activities, while income statement by function
classifies expenses according to the business operations that they support. For example, income
statement by nature shows line items such as salaries, depreciation, rent, etc., while income
statement by function allocate salaries, depreciation, rent, etc. between cost of good sold,
selling expense, general and admin expenses, etc.
Example: Template
Below is a sample income statement. The first five lines make the header followed by a multi-step
overview of expenses. All amounts other than EPS are in million USD.
IS Global, Inc.
(Consolidated) Statement of Income and Expense
for the year ended 31 December
Notes 2013 2012
Revenue 14 201.9 182.1
Cost of sales 15 (158.4) (151.6)
Gross profit 43.5 30.5
Selling and distribution expenses 16 (9.8) (8.9)
General and administrative expenses 17 (14.0) (11.0)
Other operating income and gains 18 1.8 2.6
Other operating expenses and losses 19 (3.4) (1.3)
Operating profit/earnings before interest and 18.1 11.9

taxes (EBIT)
Interest income 20 1.3 0.6
Interest expense 20 (3.6) (2.8)
Net interest expense 20 (4.9) (3.4)
Profit from investments under equity method 22 6.9 5.5
Earnings before taxes 20.1 14.0
Income taxes 23 (6.0) (4.2)
Income from continuing operations 14.1 9.8

IS Global, Inc.
(Consolidated) Statement of Income and Expense
for the year ended 31 December
Notes 2013 2012
Income from discontinued operations 24 2.1 3.1
Net income 17 16.2 12.9
Distribution of net income:
Equity-holders of parents 14.6 11.6
Non-controlling interest-holders 1.6 1.3
Earnings per share: 19
Basic, attributable parent 0.15 0.12
Diluted, attributable to parent 0.15 0.11
Basic, from continued operations, attributable to 0.14 0.10

parent
Diluted, from continued operations, attributable to 0.14 0.09

parent
Components
Following are key line items that appear on a typical income statement:
Revenue: represents the amount earned by the company in exchange of goods it supplied
and services it provided. When there are few sources of revenue, a breakup may appear on the face of
the income statement; otherwise, a separate note provides a complete picture.
Cost of sales: represents the cost of goods sold and services provided. It includes all such
costs that can be traced or assigned to goods sold or services provided. Examples include raw
materials, salaries of factory or service shop employees, manufacturing facility rent, depreciation of
manufacturing equipment, lease rentals on equipment used in manufacturing or service delivery,
indirect materials needed for production, etc. Typically, a separate note provides a complete break-up
of cost of sales.
Gross profit = revenue cost of sales; it represents the profit earned on the goods and
services of the company before any selling, general and administrative expenses and finance costs are
accounted for.
Operating expenses: mainly include selling and distribution expenses and general and
administrative expenses. Examples include salary of the CEO, marketing expenses, office rent, salaries
of administrative staff, fuel for delivery vehicles, etc.
Operating profit: (equivalent to earnings before interest and taxes (EBIT)) = gross profit
operating expenses; as the name suggests, it is the profit after cost of sales and all
operating expenses have been charged to revenue. It is before any adjustment for interest or
investment income and interest expense and taxes.
Income from continuing operations = EBIT taxes; it represents the net income (i.e.
after-tax income) earned from business components that the company intends to own in the future. It
excludes any income earned during the year from business components that are treated as
discontinued operations. Income from continuing operations provides a picture of the companys
continuing earning capacity.
Income from discontinued operations: is the after-tax income of business components
which the company has disposed-off during the year or has classified as held-for-sale at the year-end.
Net income = income from continued operations + after-tax income from discontinued
operations; a companys total net income includes income from both continued operations and
discontinued operations. It represents the income earned during the year after accounting for
all expenses. It is carried to statement of changes in shareholders equity where it is added to opening
balance of the retained earnings component of equity.
Distribution of income: a consolidated income statement provides a statement of how
the income is distributed between parent and minority shareholders.
Earnings per share (EPS): is a critical part of income statement for companies that are
required to calculate and present their EPS (mainly companies listed on a stock exchange). Both basic
EPS and diluted EPS are reported, where basic EPS = (net income preferred dividends)/weighted-
average number of common shares.
Balance Sheet
A balance sheet also known as the statement of financial position tells about the assets,
liabilities and equity of a business at a specific point of time. It is a snapshot of a business.
A balance sheet is an extended form of the accounting equation. An accounting equation is:
Assets = Liabilities + Equity
Assets are the resources controlled by a business, equity is the obligation of the company to
its owners and liabilities are the obligations of parties other than owners.
A balance sheet is named so because it lists all resources owned by the company and shows
that it is equal to the sum of all liabilities and the equity balance.
A balance sheet has two formats: account form and report form.
An account form balance sheet is just like a T-account listing assets on the debit side and
equity and liabilities on the right hand side. A report form balance sheet lists assets followed
by liabilities and equity in vertical format.
The following example shows a simple balance sheet based on the post-closing trial
balance of Company A.
Company A
Balance Sheet
As on December January 31, 2011
ASSETS LIABILITIES AND EQUITY

Current Assets: Liabilities:
Cash $20,430 Accounts Payable $5,200
Accounts Receivable 5,900 Utilities Payable 3,964
Office Supplies 4,320 Unearned Revenue 1,000
Prepaid Rent 24,000 Interest Payable 150
Total Current Assets $54,650 Notes Payable 20,000
Non-Current Assets: Total Liabilities $30,314
Equipment $80,000 Common Stock 100,000
Accumulated Depreciation 1,100 Retained Earnings 3,236
Net Non-Current Assets $78,900
Total Assets $133,550 Total Liabilities and Equity $133,550
Closing Entries
Closing entries are journal entries made at the end of an accounting period which transfer
the balances of temporary accounts to permanent accounts. Closing entries are based on
the account balances in an adjusted trial balance.
Temporary accounts include:
1. Revenue, Income and Gain Accounts

2. Expense and Loss Accounts
3. Dividend, Drawings or Withdrawals Accounts
4. Income Summary Account
The permanent account to which balances are transferred depend upon the type of
business. In case of a company, retained earnings account, and in case of a firm or a sole
proprietorship, owner's capital account receives the balances of temporary accounts.
Income summary account is a temporary account which facilitates the closing process.
Closing entries are better explained via an example.
Example
The following example shows the closing entries based on the adjusted trial balance of
Company A.
Note Date Account Debit Credit
1 Jan 31 Service Revenue 85,600
Income Summary 85,600
2 Jan 31 Income Summary 77,364
Supplies Expense 18,480
Rent Expense 12,000

Note Date Account Debit Credit
Depreciation Expense 1,100
Interest Expense 150
3 Jan 31 Income Summary 8,236
Retained Earnings 8,236
4 Jan 31 Retained Earnings 5,000
Dividend 5,000
Notes
1. Service revenue account is debited and its balance it credited to income summary
account. If a business has other income accounts, for example gain on sale account,
then the debit side of the first closing entry will also include the gain on sale account
and the income summary account will be credited for the sum of all income accounts.
2. Each expense account is credited and the income summary is debited for the sum of
the balances of expense accounts. This will reduce the balance in income summary
account.
3. Income summary account is debited and retained earnings account is credited for the
an amount equal to the excess of service revenue over total expenses i.e. the net
balance in income summary account after posting the first two closing entries. In this
case $85,600 $77,364 = $8,236. Please note that, if the balance in income summary
account is negative at this stage, this closing entry will be opposite i.e. debit to retained
earnings and credit to income summary.
4. The last closing entry transfers the dividend or withdrawal account balance to the
retained earnings account. Since dividend and withdrawal accounts are contra to the
retained earnings account, they reduce the balance in the retained earnings.
Post-Closing Trial Balance

A post-closing trial balance is a list of balances of ledger accounts prepared after closing
entries have been passed and posted to the ledger accounts. Since the closing entries
transfer the balances of temporary accounts (i.e. expense, revenue, gain, dividend and
withdrawal accounts) to the retained earnings account, the new balances of temporary
accounts are zero and therefore they are not listed on a post-closing trial balance. However,
all the other accounts having non-negative balances are listed including the retained
earnings account.
The preparation of post-closing trial balance is the last step of the accounting cycle and its
purpose is to be sure that sum of debits equal the sum of credits before the start of new
accounting period. It provides the openings balances for the ledger accounts of the new
accounting period.
Example
The following post-closing trial balance was prepared after posting the closing entries of
Company A to its general ledger and calculating new account balances:
Company A
January 31, 2010
Debit Credit
Cash $20,430
Prepaid Rent 24,000
Equipment 80,000
Accumulated Depreciation $1,100
Retained Earnings 3,236
Total $134,650 $134,650

This is the end of the accounting cycle. In the next accounting period, the accounting cycle
will be repeated again starting from the preparation of journal entries i.e. the first step of
accounting cycle.
Accounting cycle is a step-by-step process of recording, classification and summarization of

economic transactions of a business. It generates useful financial information in the form
of financial statements including income statement, balance sheet, cash flow statement and
statement of changes in equity.
The time period principle requires that a business should prepare its financial statements on
periodic basis. Therefore accounting cycle is followed once during each accounting
period. Accounting Cycle starts from the recording of individual transactions and ends on the
preparation of financial statements and closing entries.
Major Steps in Accounting Cycle
Following are the major steps involved in the accounting cycle. We will use a
simple example problem to explain each step.
1. Analyzing and recording transactions via journal entries

2. Posting journal entries to ledger accounts
3. Preparing unadjusted trial balance
4. Preparing adjusting entries at the end of the period
5. Preparing adjusted trial balance
6. Preparing financial statements
7. Closing temporary accounts via closing entries
8. Preparing post-closing trial balance
Flow Chart
.
What Is An Account?
To keep a company's financial data organized, accountants developed a system that
sorts transactions into records called accounts. When a company's accounting system
is set up, the accounts most likely to be affected by the company's transactions are
identified and listed out. This list is referred to as the company's chart of accounts.
Depending on the size of a company and the complexity of its business operations, the
chart of accounts may list as few as thirty accounts or as many as thousands. A
company has the flexibility of tailoring its chart of accounts to best meet its needs.
Within the chart of accounts the balance sheet accounts are listed first, followed by the
income statement accounts. In other words, the accounts are organized in the chart of
accounts as follows:
Assets
Liabilities
Owner's (Stockholders') Equity
Revenues or Income
Expenses
Gains
Losses
Click here to see a sample chart of accounts.
Double-Entry Accounting
Because every business transaction affects at least two accounts, our accounting
system is known as a double-entry system. (You can refer to the company's chart of
accounts to select the proper accounts. Accounts may be added to the chart of
accounts when an appropriate account cannot be found.)
For example, when a company borrows $1,000 from a bank, the transaction will affect
the company's Cashaccount and the company's Notes Payable account. When the
company repays the bank loan, the Cash account and the Notes Payable account are
also involved.
If a company buys supplies for cash, its Supplies account and its Cash account will be
affected. If the company buys supplies on credit, the accounts involved are Supplies
and Accounts Payable.
If a company pays the rent for the current month, Rent Expense and Cash are the two
accounts involved. If a company provides a service and gives the client 30 days in which
to pay, the company's Service Revenuesaccount and Accounts Receivable are
affected.
Although the system is referred to as double-entry, a transaction may involve more than
two accounts. An example of a transaction that involves three accounts is a company's
loan payment to its bank of $300. This transaction will involve the following accounts:
Cash, Notes Payable, and Interest Expense.
(If you use accounting software you may not actually see that two or more accounts are
being affected due to the user-friendly nature of the software. For example, let's say that
you write a company check by means of your accounting software. Your
software automatically reduces your Cash account and prompts you only for
the other accounts affected.)
Special Feature: Review what you are learning by working the three
interactive crossword puzzles dedicated to this topic. They are completely
free.
Click here for the Debits and Credits Crossword Puzzles
Debits and Credits

Generally these types of accounts are increased with a debit:
Dividends (Draws)
Expenses
Assets
Losses
You might think of D - E - A - L when recalling the accounts that are increased with a
debit.
Generally the following types of accounts are increased with a credit:
Gains
Income
Revenues
Liabilities
Stockholders' (Owner's) Equity
You might think of G - I - R - L - S when recalling the accounts that

are increased with a credit.
To decrease an account you do the opposite of what was done to increase the account.
For example, an asset account is increased with a debit. Therefore it is decreased with
a credit.
The abbreviation for debit is dr. and the abbreviation for credit is cr.
T-accounts
Accountants and bookkeepers often use T-accounts as a visual aid for seeing
the effect of the debit and credit on the two (or more) accounts. (Learn more
about accountants and bookkeepers in our Accounting Career Center.)
We will begin with two T-accounts: Cash and Notes Payable.
Let's demonstrate the use of these T-accounts with two transactions:
1. On June 1, 2016 a company borrows $5,000 from its bank. This causes the
company's asset Cash to increase by $5,000 and its liability Notes Payable to
also increase by $5,000. To increase the asset Cash the account needs to be
debited. To increase the company's liability Notes Payable this account needs
to be credited. After entering the debits and credits the T-accounts look like
this:
2. On June 2, 2016 the company repaid $2,000 of the bank loan. This causes the
company's asset Cash to decrease by $2,000 and its liability Notes Payable to
also decrease by $2,000. To reduce the asset Cash the account will need to
be credited for $2,000. To decrease the liability Notes Payable that account
will need to be debited. The T-accounts now look like this:
Journal Entries
Another way to visualize business transactions is to write a general journal
entry. Each general journal entry lists the date, the account title(s) to be
debited and the corresponding amount(s) followed by the account title(s) to
be credited and the corresponding amount(s). The accounts to be credited
are indented. Let's illustrate the general journal entries for the two
transactions that were shown in the T-accounts above.
When Cash Is Debited and
Credited
Because cash is involved in many transactions, it is helpful to memorize the
following:
Whenever cash is received, debit Cash.

Whenever cash is paid out, credit Cash.
With the knowledge of what happens to the Cash account, the journal entry
to record the debits and credits is easier. Let's assume that a
company receives $500 on June 3, 2016 from a customer who was given 30
days in which to pay. (In May the company recorded the sale and an
accounts receivable.) On June 3 the company will debit Cash, because cash
was received. The amount of the debit and the credit is $500. Entering this
information in the general journal format, we have:
All that remains to be entered is the name of the account to be credited.

Since this was the collection of an account receivable, the credit should
be Accounts Receivable. (Because the sale was already recorded in May, you
cannot enter Sales again on June 3.)
On June 4 the company paid $300 to a supplier for merchandise the

company received in May. (In May the company recorded the purchase and
the accounts payable.) On June 4 the company will credit Cash, because cash
was paid. The amount of the debit and credit is $300. Entering them in the
general journal format, we have:
All that remains to be entered is the name of the account to be debited.

Since this was the payment on an account payable, the debit should
be Accounts Payable. (Because the purchase was already recorded in May,
you cannot enter Purchases or Inventory again on June 4.)
To help you become comfortable with the debits and credits in accounting,
memorize the following tip:
Here's a Tip
Whenever cash is received, the Cash account is debited (and another
account is credited).
Whenever cash is paid out, the Cash account is credited (and another
account is debited).
Normal Balances
When looking at a T-account for each of the account classifications in the
general ledger, here is the debit or credit balance you would normally find in
the account:
Revenues and Gains Are Usually

Credited
Revenues and gains are recorded in accounts such as Sales, Service
Revenues, Interest Revenues (or Interest Income), and Gain on Sale of
Assets. These accounts normally have credit balances that are increased
with a credit entry.
The exceptions to this rule are the accounts Sales Returns, Sales
Allowances, and Sales Discountsthese accounts have debit balances
because they are reductions to sales. Accounts with balances that are the
opposite of the normal balance are called contra accounts; hence contra
revenue accounts will have debit balances.
Let's illustrate revenue accounts by assuming your company performed a

service and was immediately paid the full amount of $50 for the service.
The debits and credits are presented in the following general journal format:
Whenever cash is received, the asset account Cash is debited and another
account will need to be credited. Since the service was performed at the
same time as the cash was received, the revenue account Service Revenues
is credited, thus increasing its account balance.
Let's illustrate how revenues are recorded when a company performs a

service on credit (i.e., the company allows the client to pay for the service at
a later date, such as 30 days from the date of the invoice). At the time the
service is performed the revenues are considered to have been earned and
they are recorded in the revenue account Service Revenues with a credit.
The other account involved, however, cannot be the asset Cash since cash
was not received. The account to be debited is the asset
account Accounts Receivable. Assuming the amount of the service performed
is $400, the entry in general journal form is:
Accounts Receivable is an asset account and is increased with a debit;

Service Revenues is increased with a credit.
Expenses and Losses are Usually
Debited
Expenses normally have their account balances on the debit side (left side).
A debit increases the balance in an expense account; a credit decreases the
balance. Since expenses are usually increasing, think "debit" when
expenses are incurred. (We credit expenses only to reduce them, adjust
them, or to close the expense accounts.) Examples of
expense accounts include Salaries Expense, Wages Expense, Rent
Expense,Supplies Expense, and Interest Expense.
To illustrate an expense let's assume that on June 1 your company paid $800
to the landlord for the June rent. The debits and credits are shown in the
following journal entry:
Since cash was paid out, the asset account Cash is credited and another
account needs to be debited. Because the rent payment will be used up in
the current period (the month of June) it is considered to be an expense, and
Rent Expense is debited. If the payment was made on June 1 for a future
month (for example, July) the debit would go to the asset account Prepaid
Rent.
As a second example of an expense, let's assume that your hourly paid

employees work the last week in the year but will not be paid until the first
week of the next year. At the end of the year, the company makes an entry
to record the amount the employees earned but have not been paid.
Assuming the employees earned $1,900 during the last week of the year, the
entry in general journal form is:
As noted above, expenses are almost always debited, so we debit Wages
Expense, increasing its account balance. Since your company did not yet pay
its employees, the Cash account is not credited, instead, the credit is
recorded in the liability account Wages Payable. A credit to a liability account
increases its credit balance.
To help you get more comfortable with debits and credits in accounting and
bookkeeping, memorize the following tip:
Here's a Tip
To increase an expense account, debit the account.
Permanent and
Temporary Accounts
Asset, liability, and most owner/stockholder equity accounts are referred to
as "permanent accounts" (or "real accounts"). Permanent accounts are not
closed at the end of the accounting year; their balances are automatically
carried forward to the next accounting year.
"Temporary accounts" (or "nominal accounts") include all of the

revenue accounts, expense accounts, the owner drawing account, and the
income summary account. Generally speaking, the balances in
temporary accounts increase throughout the accounting year and are
"zeroed out" and closed at the end of the accounting year.
Balances in the revenue and expense accounts are zeroed out by

closing/transferring/clearing their balances to the Income Summary account.
The net amount in Income Summary is then closed/transferred/cleared to an
owner equity account, such as Mary Smith, Capital (or to Retained Earnings if
the company is a corporation). The owner drawing account (such as Mary
Smith, Drawing) is a temporary account and it is closed directly to the owner
capital account (such as Mary Smith, Capital) without going through an
income summary account.
Because the balances in the temporary accounts are transferred out of their
respective accounts at the end of the accounting year, each temporary
account will have a zero balance when the next accounting year begins. This
means that the new accounting year starts with no revenue amounts, no
expense amounts, and no amount in the drawing account.
By using many revenue accounts and a huge number of expense accounts, a

company is certain to have easy access to detailed information on revenues
and expenses throughout the year. This allows the management of the
company to monitor the performance of all parts of the company. Once the
accounting year has ended, the need to know the balances in these
temporary accounts has also ended, so the accounts are closed out and
reopened for the next accounting year with zero balances.
Bank's Debits and Credits

When you hear your banker say, "I'll credit your checking account," it means the
transaction will increase your checking account balance. Conversely, if your
bank debits your account (e.g., takes a monthly service charge from your account) your
checking account balance decreases.
If you are new to the study of debits and credits in accounting, this may seem puzzling.
After all, you learned that debiting the Cash account in the general ledger increases its
balance, yet your bank says it is crediting your checking account to increase its
balance. Similarly, you learned that crediting the Cash account in the general ledger
reduces its balance, yet your bank says it is debiting your checking account to reduce
its balance.
Although the above may seem contradictory, we will illustrate below that a bank's
treatment of debits and credits is indeed consistent with the basic accounting principles
you learned. Let's look at three transactions and consider the resultant journal entries
from both the bank's perspective and the company's perspective.
Transaction #1
Let's say that your company, Debris Disposal, receives $100 of currency from a
customer as a down payment for a future site cleanup service. When the money is
received your company makes the following entry:
(Debris Disposal's journal entry)
Because it has received cash, Debris Disposal increases its Cash account with a debit
of $100. The rules of double entry accounting require Debris Disposal to also enter a
credit of $100 into another of its general ledger accounts. Since the company has not
yet earned the $100, it cannot credit a revenue account. Instead, the liability account
Unearned Revenues is credited because Debris Disposal has a liability to do the work or
to return the $100. (An alternate title for the Unearned Revenues account is Customer
Deposits.)
Now let's say you take that $100 to Trustworthy Bank and deposit it into Debris
Disposal's checking account. Trustworthy Bank debits the bank's general ledger Cash
account for $100, thereby increasing the bank's assets. The rules of double entry
accounting require the bank to also enter a credit of $100 into another of bank's general
ledger accounts. Because the bank has not earned the $100, it cannot credit a revenue
account. Instead, the bank credits its liability account Deposits to reflect the bank's
obligation/liability to return the $100 to Debris Disposal on demand. In general journal
format the bank's entry is:
(Trustworthy Bank's journal entry)
As the entry shows, the bank's assets increase by the debit of $100 and the bank's
liabilities increase by the credit of $100. The bank's detailed records show that Debris
Disposal's checking account is the specific liability that increased.
Transaction #2
Let's say Trustworthy Bank receives a $1,000 wire transfer on your company's behalf
from a person who owes money to Debris Disposal. Two things happen at the bank: (1)
The bank receives $1,000, and (2) the bank records its obligation to give the money to
Debris Disposal on demand. These two facts are entered into the bank's general ledger
as follows:
(Trustworthy Bank's journal entry)
The debit increases the bank's assets by $1,000 and the credit increases the bank's
liabilities by $1,000. The bank's detailed records show that Debris Disposal's checking
account is the specific liability that increased.
At the same time the $1,000 wire transfer is received at the bank, Debris Disposal
makes the following entry into its general ledger:
(Debris Disposal's journal entry)

As a result of collecting $1,000 from one of its customers, Debris Disposal's Cash
balance increases and its Accounts Receivable balance decreases.
Transaction #3
Many banks charge a monthly fee on checking accounts. If Trustworthy Bank decreases
Debris Disposal's checking account balance by $13.00 to pay for the bank's monthly
service charge, this might be itemized on Debris Disposal's bank statement as a "debit
memo." The entry in the bank's records will show the bank's liability being reduced
(because the bank owes Debris Disposal $13 less). It also shows that the bank earned
revenues of $13 by servicing the checking account.
(Trustworthy Bank's general ledger)
On your company's records, the entry will look like this:
(Debris Disposal's general ledger)

Debris Disposal's cash is reduced with a credit of $13 and expenses are increased with
a debit of $13. (If the amount of the bank's service charges is not significant a company
may debit the charge to Miscellaneous Expense.)
Bank's Balance Sheet

Accounts such as Cash, Investment Securities, and Loans Receivable are reported
as assets on the bank's balance sheet. Deposits are reported as liabilities and include
the balances in its customers' checking and savings accounts as well as certificates of
deposit. In effect, your bank statement is just one of thousands of subsidiary records
that account for millions of dollars in Deposits that a bank owes to its customers.
Recap
Here are some of the highlights from this major topic:
Debit means left.

Credit means right.
Every transaction affects two accounts or more.
At least one account will be debited and at least one account will be credited.
The total of the amount(s) entered as debits must equal the total of the
amount(s) entered as credits.
When cash is received, debit Cash.
When cash is paid out, credit Cash.
To increase an asset, debit the asset account.
To increase a liability, credit the liability account.
To increase owner's equity, credit an owner's equity account.
To increase revenues, credit the revenues account
To increase expenses, debit the expense account
Introduction to Chart of Accounts
A chart of accounts is a listing of the names of the accounts that a company has
identified and made available for recording transactions in its general ledger. A
company has the flexibility to tailor its chart of accounts to best suit its needs, including
adding accounts as needed.
Within the chart of accounts you will find that the accounts are typically listed in the
following order:
Within the categories of operating revenues and operating expenses, accounts might be
further organized by business function (such as producing, selling, administrative,
financing) and/or by company divisions, product lines, etc.
A company's organization chart can serve as the outline for its accounting chart of
accounts. For example, if a company divides its business into ten departments
(production, marketing, human resources, etc.), each department will likely be
accountable for its own expenses (salaries, supplies, phone, etc.). Each department will
have its own phone expense account, its own salaries expense, etc.
A chart of accounts will likely be as large and as complex as the company itself. An
international corporation with several divisions may need thousands of accounts,
whereas a small local retailer may need as few as one hundred accounts.
Sample Chart of Accounts For a

Large Corporation
Each account in the chart of accounts is typically assigned a name and a unique
number by which it can be identified. (Software for some small businesses may not
require account numbers.) Account numbers are often five or more digits in length with
each digit representing a division of the company, the department, the type of account,
etc.
As you will see, the first digit might signify if the account is an asset, liability, etc. For
example, if the first digit is a "1" it is an asset. If the first digit is a "5" it is an operating
expense.
A gap between account numbers allows for adding accounts in the future. The following
is a partial listing of a sample chart of accounts.
Current Assets (account numbers 10000 - 16999)
10100 Cash - Regular Checking

10200 Cash - Payroll Checking
10600 Petty Cash Fund
12100 Accounts Receivable
12500 Allowance for Doubtful Accounts
13100 Inventory
14100 Supplies
15300 Prepaid Insurance
Property, Plant, and Equipment (account numbers 17000 - 18999)
17000 Land
17100 Buildings
17300 Equipment
17800 Vehicles
18100 Accumulated Depreciation - Buildings
18300 Accumulated Depreciation - Equipment
18800 Accumulated Depreciation - Vehicles
Current Liabilities (account numbers 20030 - 24999)
20130 Notes Payable - Credit Line #1

20230 Notes Payable - Credit Line #2
21000 Accounts Payable
22100 Wages Payable
23100 Interest Payable
24500 Unearned Revenues
Long-term Liabilities (account numbers 25000 - 26999)
25100 Mortgage Loan Payable

25600 Bonds Payable
25650 Discount on Bonds Payable
Stockholders' Equity (account numbers 27000 - 29999)
27100 Common Stock, No Par

27500 Retained Earnings
29500 Treasury Stock
Operating Revenues (account numbers 30000 - 39999)
31010 Sales - Division #1, Product Line 010

Cost of Goods Sold (account numbers 40000 - 49999)
41010 COGS - Division #1, Product Line 010

Marketing Expenses (account numbers 50000 - 50999)
50100 Marketing Dept. Salaries

50150 Marketing Dept. Payroll Taxes
50200 Marketing Dept. Supplies
50600 Marketing Dept. Telephone
Payroll Dept. Expenses (account numbers 59000 - 59999)
59100 Payroll Dept. Salaries

59150 Payroll Dept. Payroll Taxes
59200 Payroll Dept. Supplies
59600 Payroll Dept. Telephone
Other (account numbers 90000 - 99999)
91800 Gain on Sale of Assets

96100 Loss on Sale of Assets
Asset Accounts
Liability Accounts
Owner's Equity Accounts

Operating Revenue Accounts
Operating Expense Accounts

Non-Operating Revenues and Expenses, Gains, and Losses
Accounting software frequently includes sample charts of accounts for various types of
businesses. It is expected that a company will expand and/or modify these sample
charts of accounts so that the specific needs of the company are met. Once a business
is up and running and transactions are routinely being recorded, the company may add
more accounts or delete accounts that are never used.
At Least Two Accounts for Every

Transaction
The chart of accounts lists the accounts that are available for recording transactions. In
keeping with the double-entry system of accounting, a minimum of two
accounts is needed for every transactionat least one account is debited and at least
one account is credited.
When a transaction is entered into a company's accounting software, it is common for

the software to prompt for only one account namethis is because the software is
programmed to automatically assign one of the accounts. For example, when using
accounting software to write a check, the software automatically reduces the asset
account Cash and prompts you to designate the other account(s) such as Rent
Expense,Advertising Expense, etc.
Some general rules about debiting and crediting the accounts are:
Expense accounts are debited and have debit balances

Revenue accounts are credited and have credit balances
Asset accounts normally have debit balances

To increase an asset account, debit the account
To decrease an asset account, credit the account
Liability accounts normally have credit balances

To increase a liability account, credit the account
To decrease a liability account, debit the account

ACC Notes

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

ACC Notes

Diunggah oleh

Hak Cipta:

Format Tersedia

Introduction to Debits and Credits

When to Use a Debit or Credit in a Journal Entry

Remember the format of the Accounting Equation where Assets =

Jan Purchased office supplies costing $17,600 on account.

Jan Provided services to its customers and received $28,500 in cash.

Jan Received $4,000 as an advance payment from customers.

Jan Purchased office supplies costing $5,200 on account.

Jan Paid $5,000 as dividends.

Jan Received electricity bill of $2,470.

Jan Miscellaneous expenses paid during the month totaled $3,470

Date Account Debit Credit

Jan 1 Cash 100,000

Common Stock 100,000

Jan 2 Prepaid Rent 36,000

Jan 3 Equipment 80,000

Notes Payable 20,000

Jan 4 Office Supplies 17,600

Accounts Payable 17,600

Jan 13 Cash 28,500

Service Revenue 28,500

Jan 13 Accounts Payable 17,600

Jan 14 Wages Expense 19,100

Jan 18 Cash 32,900

Accounts Receivable 21,200

Jan 23 Cash 15,300

Accounts Receivable 15,300

Jan 25 Cash 4,000

Unearned Revenue 4,000

Jan 26 Office Supplies 5,200

Accounts Payable 5,200

Jan 28 Wages Expense 19,100

Jan 31 Dividends 5,000

Jan 31 Electricity Expense 2,470

Utilities Payable 2,470

Jan 31 Telephone Expense 1,494

Utilities Payable 1,494

Jan 31 Miscellaneous Expense 3,470

Examples of their accounting journal entries for the first month:

Date Account Names & Explanation Debit Credit

3/1 Cash 15000

Jane and Bob deposit $15,000 in their new business

Debit: increase in asset (cash)

Credit: increase in owners equity

3/5 Rent Expense 1700

Paid first month's rent of $1700.

Debit: increase in expenses (rent)

Credit: decrease in asset (cash)

3/10 Thingamajig Material - Inventory 4000

Accounts Payable 4000

To make their thingamajigs Jane purchased $4000 in

Debit: increase in assets (inventory)

Credit: increase in liabilities (AP)

3/15 Cash 1200

Account Receivable 1000

Sales of $2200. Cash sales of $1200 and sold $1000

Debit: increase in assets (cash)

Debit: increase in assets (AR)

Credit: increase in Revenue

Thingamajig Material Expense 600

Thingamajig Material - Inventory 600

$600 in Thingamajig material was used to make more

Debit: increase in expenses (Thingamajig Material)

Credit: decrease in asset (inventory)

3/28 Accounts Payable 1800