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McGraw-Hill Ryerson

College Accounting Second Canadian Edition Price • Haddock • Brock • Reed. McGraw-Hill Ryerson. 1. CHAPTER 3. DEBITS AND CREDITS. 2. OBJECTIVE 1 Define debit and credit. 3. DEBITS AND CREDITS. DEBIT: An entry on the left side of an account.

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McGraw-Hill Ryerson

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  1. College Accounting Second Canadian Edition Price • Haddock • Brock • Reed McGraw-Hill Ryerson 1

  2. CHAPTER 3 DEBITS AND CREDITS 2

  3. OBJECTIVE 1 Define debit and credit. 3

  4. DEBITS AND CREDITS • DEBIT: An entry on the left side of an account. • “a record of indebtedness” • CREDIT: An entry on the right side of an account. • “something entrusted to another” 4

  5. OBJECTIVE 2 • Describe the relationship • between debits and credits, • and the accounting equation. 5

  6. AS WE ALREADY KNOW, ASSETS = LIABILITIES + OWNER’S EQUITY THE EQUATION MUST BALANCE: LEFT = RIGHT IN THE SAME WAY: DEBITS = CREDITS 6

  7. DOUBLE-ENTRYACCOUNTING Every transaction must have at least two parts. DEBIT CREDIT 7

  8. WHERE TO RECORD INCREASES AND DECREASES ASSETS = LIABILITIES + OWNER’S EQUITY LEFT RIGHT LIABILITY ACCOUNTS -+ Record Record decreases increases DEBIT CREDIT OWNER’S EQUITY ACCOUNT -+ Record Record decreases increases DEBIT CREDIT ASSET ACCOUNTS + - Record Record increasesdecreases DEBIT CREDIT 8

  9. OBJECTIVE 3 • Record transactions in the • General Journal. 9

  10. ACCOUNTS • Separate written records kept for the business’s assets, liabilities, and owner’s equity. • Identified by their account CLASSIFICATION (asset, liability, or owner’s equity). 10

  11. JOURNAL • A diary of business activities -- transactions. • Transactions are entered in the journal in chronological order. • First accounting record. Sometimes called a record of original entry. • There are many different types of journals. 11

  12. GENERAL JOURNAL • Used to record all types of business transactions. • The process of recording transactions in the general journal is referred to as journalizing. 12

  13. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 6 Cash 40,000.00 John Arrow, Capital 40,000.00 Beginning investment of owner Account titles are written in the journal exactly as they appear in the chart of accounts. Explanationsshould be complete but concise. Page numbers are located in the upper right-hand corner of the journal. 13

  14. TRANSACTION #1 • Cash increased by $40,000. • $40,000 is entered in the left (debit) column of the journal. • John Arrow, Capital increased by $40,000. • $40,000 is entered on the right (credit) column of the journal John Arrow invested $40,000 cash in the business. 14

  15. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 6 Cash 40,000.00 John Arrow, Capital 40,000.00 Beginning investment of owner Record the date. Next, record the increase (debit) to cash Indent 1/2 inch and record the increase (credit) to John Arrow, Capital. Indent again and write the description of the transaction. 15

  16. TRANSACTION #2 • Prepaid Rent increased by $20,000. • $20,000 is entered in the left (debit) column of the journal • Cash decreased by $20,000. • $20,000 is recorded on the right (credit) to decrease Cash The firm paid $20,000 in cash for eight months’ worth of rent in advance. 16

  17. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 7 Prepaid Rent 20,000.00 Cash 20,000.00 Paid rent in advance for an eight-month period (December 20X5 through July 20X6), Cheque 1001 When possible the explanation should refer to a source document such as a check, purchase order or memorandum number. Source document numbers are part of an audit trail. 17

  18. TRANSACTION #3 • Equipment increased by $10,000. • $10,000 is entered in the left (debit) side of the journal. • Cash decreased by $10,000. • $10,000 is entered on the right (credit) side of the journal. The firm purchased new assets in the form of equipment at a cost of $10,000. 18

  19. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 9 Equipment 10,000.00 Cash 10,000.00 Purchased equipment, Cheque1002 19

  20. TRANSACTION #4 • The firm purchased new assets in the form of equipment at a cost of $5,000. • The firm charged the $5,000 to their account with a company named Organ, Inc. • Equipment increased by $5,000, entered in the left column. • Accounts Payable increased by $5,000, entered in the right column. • (NOTE : Cash was not affected in this transaction since the equipment was purchased on account.) 20

  21. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 10 Equipment 5,000.00 Accounts Payable 5,000.00 Purchased equipment, on credit from Organ, Inc., Invoice 2788, payable in 60 days 21

  22. TRANSACTION #5 • Supplies increased by $1,000 on the left (debit) side. • Cash decreased by $1,000, on the right (credit) side. • The firm purchased new assets in the form of supplies at a cost of $1,000. • The supplies were paid for in cash. 22

  23. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 28 Supplies 1,000.00 Cash 1,000.00 Purchased supplies, Cheque1003 23

  24. TRANSACTION #6 • Accounts Payable decreased by $1,000, entered on the left (debit) side. • Cash decreased by $1,000, entered on the right (credit) side. • The firm paid $1,000 on account. • The amount owed to Organ, Inc. (creditor) was reduced by the $1,000 payment. 24

  25. GENERAL JOURNAL Page 1 DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Nov. 30 Accounts Payable 1,000.00 Cash 1,000.00 Paid Organ, Inc., on account for Invoice 2788, Cheque 1004 25

  26. OBJECTIVE 4 • Post transactions from the • General Journal to • T accounts. 26

  27. LEDGER • All accounts together are referred to as a ledger. • A record of final entry. 27

  28. T ACCOUNT • An account in the shape of a T. • The account name is written on the top line. • Used by accountants to enter increases and decreases in the account 28

  29. LIABILITIES - + Record Record Decreases Increases DEBITS CREDITS LEFT SIDE RIGHT SIDE OWNER’S EQUITY - + Record Record Decreases Increases DEBITS CREDITS LEFT SIDE RIGHT SIDE ASSETS + - Record Record Increases Decreases DEBITS CREDITS LEFT SIDE RIGHT SIDE T ACCOUNTS = + 29

  30. POSTING • Transferring data from a journal to a ledger. 30

  31. GENERAL JOURNAL Page 1 POST. DATE EXPLANATION REF. DEBIT CREDIT Nov. 7 Prepaid Rent 20,000.00 Cash 20,000.00 Paid rent in advance for an eight-month period (December 2002 through July 2003), Cheque 1001 Prepaid Rent 20,000.00 Cash 20,000.00 31

  32. ACCOUNT BALANCE • The difference between the amounts recorded on the two sides of an account. • Computed by: • Adding the figures on each side of the account. • Subtracting the smaller total from the larger. 32

  33. Cash +- (a) 40,000 (d) 20,000 (f) 10,000 (j) 1,000 (k) 1,000 32,000 Footing BALANCING AN ACCOUNT Bal. 8,000 33

  34. LIABILITIES - + Decrease Increase OWNER’S EQUITY - + Decrease Increase ASSETS + - Increase Decrease (Normal Balance) (Normal Balance) NORMAL BALANCES = + (Normal Balance) Debits Credits Debits Credits Debits Credits 34

  35. ASSETS = LIABILITIES + OWNER’S EQUITY Cash Accounts Payable John Arrow, Capital + + + (a) 40,000 (d) 20,000 (l) 1,000 (h) 5,000 (b) 40,000 (f) 10,000 Bal. 4,000 (j) 1,000 (k) 1,000 Bal. 8,000 32,000 Supplies + SUMMARY OF ACCOUNT BALANCES (j) 1,000 ASSETS = LIABILITIES + OWNER’S EQUITY Prepaid Rent 8,000 4,000 40,000 + 1,000 (c) 20,000 20,000 15,000 Equipment + 44,000 = 4,000 + 40,000 (e) 10,000 (g) 5,000 Bal.15,000 35

  36. ARROW EMPLOYMENT SERVICES BALANCE SHEET NOVEMBER 30, 20X5 Assets Liabilities Cash 8,000.00 Accounts Payable 4,000.00 Supplies 1,000.00 Prepaid Rent 20,000.00 Owner’s Equity Equipment 15,000.00 John Arrow, Cap. 40,000.00 Total Assets 44,000.00 Total Liab.& O. E. 44,000.00 36

  37. OBJECTIVE 5 Record transactions affecting owner’s equity in the general Journal. 37

  38. REVENUE ACCOUNTS • Results when a company performs services for another company. • Payment for services can be in the form of cash or on account. • A separate revenue account can exist for each specific type of revenue. • Revenue is a subdivision of owner’s equity. 38

  39. OWNER’S EQUITY REVENUE IncreaseSide DecreaseSide IncreaseSide Decrease Side • Revenue is a subdivision of owner’s equity. • Revenue increases owner’s equity. Owner’s Equity is increased on the right-hand side. Revenue is increased on the right-hand side. • NOTE:At the end of the period, revenue will be closed out to owner’s equity. At the present time we want to keep revenue separated from owner’s equity. 39

  40. TRANSACTION #7 • Cash is increased by $10,500 • Revenue is increased by $10,500 • The firm performed services totaling $10,500. • Payment was received in cash. 40

  41. GENERAL JOURNAL Page__1__ DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Dec . 31 Cash 10,500.00 Fees Income 10,500.00 Performed services for cash 31 Accounts Receivable 3,500.00 Fees Income 3,500.00 Performed services on credit 31 Cash 1,500.00 Accounts Receivable 1,500.00 Received cash from credit clients on account 41

  42. EXPENSE ACCOUNTS • Expenses are the company’s cost of doing business. • A separate expense account exists for each specific type of expense. • Examples of expenses: salaries, utilities, insurance, and rent. 42

  43. GENERAL JOURNAL Page__1__ DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Dec . 31 Salaries Expense 2,500.00 Cash 2,500.00 Paid monthly salaries, Cheques 1005 - 1006 31 Utilities Expense 300.00 Cash 300.00 Paid monthly bill for utilities, Cheque 1007 31 John Arrow, Drawing 1,000.00 Cash 1,000.00 Owner withdrew cash for personal expenses, Cheque 1008 43

  44. OBJECTIVE 6 Prepare compound journal entries. 44

  45. COMPOUND ENTRIES • Compound entries contain several debits or several credits. • All debits are recorded first followed by the recording of credits. 45

  46. GENERAL JOURNAL Page__1__ DATE DESCRIPTION POST . DEBIT CREDIT REF. 10,000.00 10,000.00 20X5 Dec . 31 Equipment 10,000.00 Cash 5,000.00 Accounts Payable 5,000.00 Purchased equipment on credit from Organ, Inc., Invoice 2787, issued Cheque 1002 for a $5,000 down payment; bal. due 30 days Arrow Employment Services purchased equipment for $10,000. John Arrow gave $5,000 in cash (Check 1002) and agreed to pay the balance in 30 days. REMEMBER! No matter how many accounts are involved, the total debits must equal the total credits in each entry. 46

  47. GENERAL JOURNAL Page__15__ DATE DESCRIPTION POST . DEBIT CREDIT REF. 20X5 Aug. 5 Office Equipment 141 800.00 Cash 101 800.00 Purchased equipment, Cheque 6421 Sept. 1 Shop Equipment 151 800.00 Office Equipment 141 800.00 To correct error made in Aug. 5 entry when a purchase of shop equipment was recorded as office equipment 53

  48. AUDIT TRAIL • A chain of references that makes it possible to trace information through the accounting system 54

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