college accoudnting

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College Accounting First Canadian
Edition Price Haddock Brock Hahn
Reed
McGraw-Hill Ryerson
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CHAPTER 3
DEBITS AND CREDITS
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OBJECTIVE 1 Define debit and credit.
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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

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OBJECTIVE 2 Describe the relationship between
debits and credits, and the accounting equation.
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AS WE ALREADY KNOW, ASSETS LIABILITIES
OWNERS EQUITY
THE EQUATION MUST BALANCE LEFT RIGHT
IN THE SAME WAY DEBITS CREDITS
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DOUBLE-ENTRY ACCOUNTING
Every transaction must have at least two parts.
DEBIT
CREDIT
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WHERE TO RECORD INCREASES AND DECREASES


ASSETS LIABILITIES OWNERS
EQUITY
LEFT
RIGHT
LIABILITY ACCOUNTS -
Record Record decreases
increases DEBIT CREDIT
OWNERS EQUITY ACCOUNT -
Record Record
decreases increases DEBIT
CREDIT
ASSET ACCOUNTS
- Record Record
increases decreases DEBIT
CREDIT
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OBJECTIVE 3 Record transactions in the General
Journal.
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ACCOUNTS

• Separate written records kept for the businesss
  assets, liabilities, and owners equity.

• Identified by their account CLASSIFICATION
  (asset, liability, or owners equity).

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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.

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GENERAL JOURNAL

• Used to record all types of business transactions.

• The process of recording transactions in the
  general journal is referred to as journalizing.

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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.
Explanations should be complete but concise.
Page numbers are located in the upper right-hand
corner of the journal.
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TRANSACTION 1
John Arrow invested 40,000 cash in the business.

• 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

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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.
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TRANSACTION 2
The firm paid 20,000 in cash for eight months
worth of rent in advance.

• 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

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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.
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TRANSACTION 3
The firm purchased new assets in the form of
equipment at a cost of 10,000.

• 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.

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Equipment
10,000.00
Cash

10,000.00
Purchased equipment, Cheque1002
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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 effected in this transaction
since the equipment was purchased on account.)
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Equipment
5,000.00
Accounts Payable

5,000.00
Purchased equipment, on credit from Organ, Inc.,
Invoice 2788, payable in 60 days
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TRANSACTION 5

• The firm purchased new assets in the
• form of supplies at a cost of 1,000.
• The supplies were paid for in cash.

• Supplies increased by 1,000 on the left (debit)
  side.
• Cash decreased by 1,000, on the right (credit)
  side.

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Supplies

1,000.00
Cash

1,000.00
Purchased supplies, Cheque1003
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TRANSACTION 6

• The firm paid 1,000 on account.
• The amount owed to Organ, Inc. (creditor) was
  reduced by the 1,000 payment.

• Accounts Payable decreased by 1,000, entered on
  the left (debit) side.
• Cash decreased by 1,000, entered on the right
  (credit) side.

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Accounts Payable
1,000.00
Cash

1,000.00
Paid Organ, Inc., on account for Invoice 2788,
Cheque 1004
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OBJECTIVE 4 Post transactions from the General
Journal to T accounts.
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LEDGER

• All accounts together are referred to as a ledger.

• A record of final entry.

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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

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T ACCOUNTS




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POSTING

• Transferring data from a journal to a ledger.

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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.

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BALANCING AN ACCOUNT
Bal. 8,000
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NORMAL BALANCES


(Normal Balance)
Debits
Credits
Debits
Debits
Credits
Credits
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ASSETS
LIABILITIES OWNERS
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 OWNERS
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
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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 Owners
Equity Equipment 15,000.00
John Arrow, Cap. 40,000.00 Total
Assets 44,000.00 Total Liab. O.
E. 44,000.00
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OBJECTIVE 5 Record transactions affecting owners
equity in the general Journal.
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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 owners equity.

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• Revenue is a subdivision of owners equity.

• Revenue increases owners equity. Owners 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 owners equity. At the present
  time we want to keep revenue separated from
  owners equity.

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TRANSACTION 7

• The firm performed services totaling 10,500.

• Payment was received in cash.

• Cash is increased by 10,500
• Revenue is increased by 10,500

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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
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EXPENSE ACCOUNTS

• Expenses are the companys cost of doing
  business.

• A separate expense account exists for each
  specific type of expense.

• Examples of expenses salaries, utilities,
  insurance, and rent.

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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
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OBJECTIVE 6 Prepare compound journal entries.
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COMPOUND ENTRIES

• Compound entries contain several debits or
  several credits.

• All debits are recorded first followed by the
  recording of credits.

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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 Accounting 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.
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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
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AUDIT TRAIL

• A chain of references that makes it possible to
  trace information through the accounting system

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