DEBIT AND CREDIT ENTERIES

DEBIT
An amount entered on the left hand side of a ledger account. A debit is used to record an
increase in an asset or a decrease in a liability or in owner’s equity.

CREDIT
An amount entered on the right hand side of a ledger account. A credit is used to record
decrease in an asset or an increase in a liability or in owner’s equity.

RULES OF DEBIT AND CREDIT BALANCE SHEET ACCOUNT

RULES OF DEBIT

Increase in asset
Decrease a liability
Decrease an owner’s equity
Increase an expense
Decrease revenue

RULES OF CREDIT

Decrease an asset
Increase a liability
Increase an owner’s equity
Decrease an expense
Increase revenue

DOUBLE ENTRY SYSTEM OF ACCOUNTING

Double entry system of accounting takes its name from the fact those two types of entries
1.Debit entries to one or more accounts
2.Credit entries to one or more accounts
In recording any transaction, the total dollar amount of Debit entries must equal the total
dollar amount of Credit entries.

THE ACOUNTING EQUATION

Assets = Liabilities + Owner’s equity

ASSETS
Economics resources owned by an entity
LIABILITIES
Debit or obligations of an entity that resulted from past transactions.

OWNER’S EQUITY:
The excess of assets over liabilities.

GENERAL JOURNAL:
The simplest type of general it has only to many columns 1 for credit and 1 for debit.
This journal may be used for all types of transactions, which are later posted to the
appropriate ledger account

RECORDING TRANSACTION IN GENERAL JOURNAL:

The name of the account to be debited is written first, and the dollar amount to be debited
appears in the left hand money column.
The name of the account credited appears below the account debited and is indented to
the right. The dollar amount credited appears in the right hand money column.
A brief description of each transaction appears immediately below each journal entry.

NOV 1 : Owner started the business by depositing $80000 in a company bank account

NOV 3: Purchased land for $52000 by paying cash.

NOV 5: Purchased a building for $36000 paying $6000 in cash and issuing a note
Payable of remaining $30000.

NOV 17: Purchased tools and equipments on account $13800

NOV 20: sold some of the tools at a price equal to their cost $1800 collectible with in 45
Days.

NOV 25: Received $600 in partial collection of the account receivable from the sale of
Tools.

NOV 26: Paid $6800 in partial payment of an account payable.

 DATE

NOV 1 GENERAL JOURNAL

PARTICULARS
CREDIT
NOV 3 DEBIT
CASH
CAPITAL
$80000 $80000
(Owner invested cash in business)
NOV 5
LAND
CASH
520000 52000
(Purchased land for business site)

BUILDING
NOV 17
CASH
36000 36000
(Purchased building paid part cash,
Balance payable within 90 days)

TOOLS ANF EQUIPMENT

ACCOUNTS PAYABLE
13800 13800
(Purchased tools and equipment on credit)
NOV 20
ACCOUNT RECIEVABLE
TOOLS AND EQUPMENT
1800 1800
(Sold unused tools and equipment on account)

CASH
ACCOUNT RECIEVABLE
600 600
(Received cash)

ACCOUNT PAYABLE
CASH
NOV 25 6800 6800
(Paid cash)
.

NOV 26
WHAT IS NET INCOME?
An increase in owner’s equity resulting from profitable operations. Also, the excess of
revenue earned over the related expenses for a given period.

ASSET = LIABILTITIES + OWNER’S EQUITY

Increase = decrease

Either (or both) of these effects. …but this is what net income really
Occur as net income is earned…. means.

ACCOUNTING PERIOD
The period of time covered by an income statement is termed the company’s accounting
period.

TIME PERIOD PRINCIPLE

To provide the users of financial statement with timely information, net income is
measured for relatively short accounting periods of equal length. This concept, called the
time period principle.

REVENUE
Revenue is the price of goods sold and services rendered during a given accounting
period.
 Earning revenue causes owner’s equity to increase.

TYPES OF REVENUE

AUTO SERVICE REPAIR SERVICE REVENUE

SALES MERCHANDISE SALES REVENUE

And so on…
EXPENSES

Expenses are the costs of the goods and services used up in the process of earning
revenue.

Example:
Include the cost of employee’s salaries, advertising, rent, utility, buildings, automobiles
and office equipment.
All of these costs are necessary to attract a serve customer and they’re by earned revenue.
 An expenses always causes a decrease in owner’s equity

DEBIT AND CREDIT RULES FOR REVENUE

 Increases in owner’s equity are recorded by credits.

 Decreases in owner’s equity are recorded by debits.

This rule is now extended to cover revenue and expenses accounts:

 Revenue increases owner’s equity; therefore, revenue is recorded by a credit.

 Expenses decrease owner’s equity; therefore, expenses are recorded by debits.

OWNER’S EQUITY

Decreases recorded by debits. Increases recorded by credits.

Expenses decrease owner’s equity. Revenue increases owner’s equity.

Expenses are recorded by debits. Revenue is recorded by a credit.

Drawings decrease owner’s equity.

Drawings are recorded by debits.
 RECORDING DECEMBER’S REVENUE AND EXPENSE
TRANSACTION: AN ILLUSTRATION:
DEC 1 Paid daily tribune $360 cash for newspaper advertising to be run during
December.
ANALYSIS the cost of advertising in an expenses.
The asset cash in decreased.

DEBIT CREDIT Expenses decreases owner’s equity and are recorded by debit
RULE sides; debits advertising expense $360.
Decreases in asset are recorded by credits; credit cash $360.

GENERAL ENTRY Dec 1 Advertising Expenses 360

Cash 360

ENTERIES IN CASH ADVERTISING EXPENSE

LEDGER 11/30 BAL: 16600 12/1 360 12\1 360
ACCOUNTING

DEC 2 Purchased radio advertising from KRAM to be aired in December. the cost was
$470,payable within 30 days.

ANALYSIS the cost of advertising in an expenses.

The liability accounts payable is incurred.

DEBIT CREDIT Expenses decreases owner’s equity and are recorded by debit
RULE sides; debits advertising expense $470
Increasing in liabilities is recorded by credits; credit accounts
Payable $470.

JOURNAL ENTRY Dec 2 Advertising Expenses 470

Account payable 470

ENTERIES IN ACCOUNTS PAYABE ADVERTISING EXPENSE

LEDGER
ACCOUNTING 11/30 BAL 7000 12/1 360
12/2 470 12/2 470
 DEC 5 Collected $4980 cash for repairs made to vehicles of airport shuttle service.

ANALYSIS The asset cash is increased.

Revenue has been earned.

DEBIT CREDIT Increase in assets are recorded by debits; debit cash $4980.
RULE Revenue increases owner’s equity and is recorded by a credit;
Credit repair service revenue $4980

GENERAL ENTRY Dec 5 Cash 4980

Repair service revenue 4980

ENTERIES IN CASH REPAIR SERVICE REVENUE

LEDGER 11/30 BAL: 16600 12/1 360 12/5 4980
ACCOUNTING 12/5 4980

DEC: 15 Billed harbor Cab Co.. $5400 for maintenance and repair services rendered
during December. The agreement with Harbor Cab calls for payment to be received.

ANALYSIS An assets accounts receivable is acquired.

. Revenue has been earned.

DEBIT CREDIT Increase in assets are recorded by debits; debit accounts

receivable $5400.
RULE Revenue increases owner’s equity and is recorded by a credit;
credit repair service revenue $5400.
GENERAL ENTRY Dec 15 Account Receivable $ 5400

Repair service revenue $ 5400

ENTERIES IN ACCOUNT RECEIVABLE REPAIR SERVICE REVENUE

LEDGER 12/31 5400 12/31 5400
ACCOUNTING
 LEDGER
An accounting system includes a separate record for each item that appears in the
financial statements. Collectively, these records are referred to as a company’s ledger.
Individually, these records are often referred to as ledger accounts.

DB: CASH CR:

NOV. 1 80,000
52000
6000
600
6800
BAL:(C/D) 15800
BAL:(B/D) 15800

DB: TOOLS AND EQIPMENT CR:

NOV. 17 13800
20 1800

BAL:(C/D) 12000
BAL:(B/D) 12000

DB: ACCOUNT RECIEVABLE CR:

NOV. 20 1800
600

BAL:(C/D) 1200
BAL:(B/D) 1200

DB: LAND CR:

NOV. 3 52000

BAL:(C/D) 52000
BAL:(B/D) 52000
DB: BUILDING CR:

NOV. 5 36000

BAL:(C/D) 36000
BAL:(B/D) 36000

DB: ACCOUNT PAYABLE CR:

NOV. 17 13800
26 6800

BAL:(C/D) 7000 BAL:(B/D) 7000

DB: NOTES PAYABLE CR:

NOV. 5 30000

BAL:(C/D) 30000 BAL:(B/D) 30000

DB: CAPITAL CR:

NOV. 1 80000

BAL:(C/D) 80000 BAL:(B/D) 80000

TRIAL BALANCE
TRIAL BALANCE

In trial balance equal dollar amounts (any currency) of debit and credits are entered in the
accounts for every transaction recorded.
In trial balance we verify that the sum of all debits in ledger must be equal to sum of all
credits and if it happens then the accounting balances has been accurate.
This proof of the equality of debit and credit balances is called a trial balance
Debit balances are listed in lift side columns and credit balances in right hand side
In trial balance we put all the balance (B\D) of ledger account.
Trial balance contains income statement account as well as balance sheet accounts.

PARTICULAR CREDIT
S.NO
DEBIT
CASH
01
ACCOUNT RECEIVABLE
02 15800
LAND
03 1200
BUILDING
04 52000
TOOLS AND EQUIPMENT
05 36000
NOTES PAYABLE 30000
06 12000
ACCOUNTS PAYABLE 70000
07
CAPITAL 80000
08

117000 117000

ADJUSTING ENTERIES:
Entire require at the end of the period to update the accounts before financial statements
are prepared.
Adjusting entries are essential steps in accounting cycle serve to apportion transactions
properly between the accounting periods affected and to record any revenue earned and
expenses incurred that have not been recorded prior to the end of the period.

PURPOSE OF ADJUSTING ENTERIES

The purpose of adjusting entries is assign to each period the appropriate amounts of
revenue or expenses
In summary, adjusting entries are needed whenever transactions affect the revenue or
expenses of more than one accounting period.
Those entries assign revenues to the period in which they are earned and expenses to te
periods in which they are relate goods and services are used.

CHARACTERISTICS OF ADJUSTING ENTERIES:

There are two important characteristics of adjusting entries.

RECOGNITION OF EITHER REVENUE OR EXPENSES.

Every adjusting entry involves this reognition. Revenue and expenses represent changes
in the OWNER EQUITY’S.

R => Profit => O.E (CREDIT)

E => Loss => O.E (DEBIT)

Thus every adjusting entry affects both an income statement account (revenue or
expense) and also balance sheet account (asset or liability).

CONCEPT OF ACCURAL ACCOUNTING

Adjusting entries are based on the concept of accrual accounting not on monthly bills or
month end transactions

ACCURAL ACCOUNTING

The effects of events on the business are recognized as services are rendered or consumed
resources when cash is received or paid.

REVENUE
Revenue is the price of goods sold and services rendered during a given accounting
period

EXPENSES
Expenses are the costs of the goods and services used up in the process of earning
revenue

APPORTING RECORDING COSTS:

When a business makes an expenditure that will benefit more than one accounting period,
the amount is usually debited to an asset account. At the end of each period benefiting
from this expenditure, an adjusting is made to transfer an appropriate portion of the cost
from the asset account to an expense account.

PREPAID EXPENSES
Assets representing advance payment of the expenses of future accounting periods. As
time passes, adjusting entries are made to transfer the related costs rom the asset account
to an expense account.

SHOP SUPPLIES:
As December 31, the balance in overnight’s shop supplies amount is $1800. Assume that
a December 31, there are about $1200 worth of shop supplies remaining on hand. The
suggest supplies costing about $600 have been used in December.

Dec 31: SHOP SUPPLIES EXPENSE $600

SHOP SUPPLIES $600
(Estimate of shop supplies used in December)

INSSURANCE POLICY.
Insurance policy is also a prepaid expense.
As February 1, overnight purchased for $18000 a one year insurance policy providing
comprehensive liability insurance and insurance against fire and et. This $18000
expenditure provides insurance coverage for a period of one year. Therefore, 1/12 of this
cost is $1500 for a month.

Dec 31: INSURANCE EXPENSE $1500

UNSEXPIRED INSURANCE $1500
DEPRECIATION (Insurance expense for December)
The systematic allocation of the cost of an asset to expense during the periods of its
useful life.
Depreciation On Tools And Equipment:

Over night depreciates its tools and equipment over a period of five years (60month). The
December 31 trial balance shows the company owns tools and equipment that cost
$15000 therefore the adjusting entry to record December’s depreciation expense is:

Dec 31: DEPRECIATION EXPENSE (Tools and Equipment) $600

ACCUMULATED DEPRECIATION ) (Tools and Equipment) $600

(Monthly depreciation on tools and equipment)

($15000 / 60 months = $250/month)

APPORTING UNEARNED REVENUE

UNEARNED REVENUE
An obligation to deliver goods or render services in the future, stemming from the receipt
of advance payment.
Remember that unearned revenue is a liability not a revenue account.

As company is going to give his part of building on rent and he agreed upon rent in
$6000 per month and client have paid for three months rent. At December 31 he served 1
month rent so he 1 month rent revenue earned and this entry will pass in the following
manner

Dec 31: UNEARNED RENT REVENUE $2000

RENT REVENUR EARNED $2000

(Portion of rent received)

($6000 /3 months = $2000/month)

RECORDING UNRECORDED EXPENSES:

ACCURAL OF WAGES (OR SALARIES) EXPENSE.

As 31 December company came to know that he has dues salaries $40000 which he has
to pay and the company pass the adjusting entry.

Dec 31: SALARIES EXPENSE $40000

SALARIES PAYABLE $4000
(To adjust salaries expense for December)

INSURANCE EXPENSE:

As company purchased a building on credit and issued a note payable 40000 for 2 year
and also agreed to pay per month interest. Now company has dues of interest, which he
has to pay because it has its liability. The company pays interest 9 % after 3 month and
the adjusting entry of this transaction will be:

Dec 31: INTEREST EXPENSE $300

INTEREST PAYABLE $300
(Interest expense accrued during December)
($4000*.09*1/12 = 300)

RECORDING UNRECORDED REVENUE:

To illustrate this type of entry assume that in December Company provided his services
of $10000 and no revenue got and no entry passed so we will writer this entry:

Dec 31: ACCOUNT RECIEVABLE $10000

SERVICE REVENUE $10000
(Company provided service during December)
 THE ADJUSTED TRIAL
BALANCE
A listing of all ledger account balances after the amounts have been changed includes the
adjusting entries made at the end of the period.
It also provides a completing listing of the account balances to be used in preparing the
financial statement. Every account of the trial balance contains its end of the period
balance with the exception of the owner’s capital account.

ADJUSTED TRIAL BALANCE

S.NO DEBIT
PARTICULAR
01 14220
CASH
02 6600 CREDIT
ACCOUNT RECEIVABLE
03 1000
SHOP SUPPLIES
04 52000
LAND
05 36000
BUILDING
06
ACCMULATED DEPRECIATION (BUILDING)
07 12000
TOOLS AND EQUIPMENT
08
ACCMULATED DEPRECIATION (TOOL & EQU:)
09 160
NOTES PAYABLE
10
ACCOUNTS PAYABLE
11 200
CAPITAL
12 3100 30000
DRAWING
13 8870
REPAIR SERVICE REVENUE
14 830 81800
ADVERTISING EXPENSE
15 4900
WAGES EXPENSE
16 400 10380
SUPPLIES EXPENSE
17 150
DEPRECIATION EXPENSE (BUILDING)
18 200
DEPRECIATION EXPENSE (TOOL & EQUI:)

$131400 $131400

CLOSING ENTRIES
Journal entries made at the end of the period for the purpose of closing temporary
accounts and transferring balances to the owner's capital account.

PURPOSE OF CLOSING ENTRIES

Closing entries serve two basic purposes. the first is to return the balances of the
temporary owner's equity accounts to zero so that these accounts may be used to measure
the activities of the next accounting period. The second purpose of closing entries is to
update the balance of the owner's capital account.

INCOME SUMMARY
The summary account in the ledger to which revenue and expense accounts are closed at
the end of the period. The balance is transferred to the owner's capital account.

CLOSING ENTRIES FOR REVENUE ACCOUNTS

Close the revenue accounts into the income summary account.

DEC.31 REVENUE 10000

INCOME SUMMARY 10000
( close a revenue account )

CLOSING ENTRIES FOR EXPENSE ACCOUNTS:

Close the expense account into the income summary account.

NOV.30 INCOME SUMMARY 6000

EXPENSE 6000
( Close the expense account )
CLOSING THE INCOME SUMMARY ACCOUNTS
Close the balance of the income summary account into the owner's capital account.

DEC.31 INCOME SUMMARY 4000

CAPITAL 4000
(Close the income summary account)

CLOSING THE OWNER'S DRAWING ACCOUNTS

Close the drawing account into the owner's capital account.

DEC.31 CAPITAL 2000

DRAWING 2000
(Close the drawing account)

AFTER CLOSING TRIAL BALANCE

A trial balance prepared after all closing entries have been made.Consist only of accounts
for assets ,liabilities and owner's equity.

CONCLUSION
We use accounting cycle in many ways.some are as follow
1.Determinig the information needs of decision makers
2.Designing systems to provide the information quickly
3.Evaluating the effeciency of operations throughout the organizations
4.Assistig decision makers in interpreting accounting information
5.Auditing
6.Forecasting the probable results of future operations
7.Tax planning