DEBITS AND CREDITS

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DEBITS AND CREDITS

• Learning Activity Package
• By Cheryl Micke

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DEBITS AND CREDITS

• RATIONALE Debits and Credits are the
  foundation of accounting. It is very difficult to
  be successful in accounting if you do not have a
  complete understanding of debits and credits.
• Going further in accounting without
  understanding debits and credits would be like
  learning how to drive without having a car!
• This L.A.P. has been designed to explain the
  concept of debits and credits in a simplified
  manner. You will be guided through this important
  concept in a very sequential manner. You will be
  provided with many examples to help increase your
  understanding. Included within this L.A.P. are
  also two self-assessment areas as well as a Final
  Exam, to ensure that you have a solid
  understanding of the material provided.

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DEBITS AND CREDITS

• PERFORMANCE OBJECTIVES
• The students will be able to
• Create the appropriate T-account with 88
  accuracy.
• Record the opening balances of accounts on the
  proper side of a
• T-account with 88 accuracy.
• Record debit and credit transactions within a
  T-account with 88 accuracy.

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PRE-ASSESSMENT

• Please complete the following test to
  determine your present knowledge about Debits and
  Credits.
• If you are able to correctly answer each
  question, you
• will be able to skip this L.A.P. and proceed
  to journalizing
• transactions. However, if you have one or
  more errors,
• please work through this L.A.P. It should
  take you about two hours to complete this
  L.A.P.
• When you have completed the pre-assessment,
  you can
• check your answers with those provided at the
  back of
• this L.A.P.

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PRE-ASSESSMENT

• True or False Circle the correct response.
  
• The term Credit means to increase.
  T F
• The term Debit means to decrease. T
  F
• Accounts Receivable is a Liability account.
  T F
• Supplies normally have a Debit balance.
  T F
• Accounts Payable normally have a Credit balance.
  T F
• We debit Accounts Receivable to show that
  customers
• have paid part or all of their account.
  T F
• Land is an asset account.
  T F
• The opening balance of an asset account is found
  on the
• right side of a T-account.
  T F

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Debits and Credits

• In our lessons this far, whenever we made a
  transaction, we simply increased or decreased the
  appropriate side of the accounting equation.
• Debits and Credits are the terms we will use from
  now on when we record a transaction.

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Accounting Equation

• This is the Accounting Equation we have used in
  our past classes to make balance sheet changes.
• A L OE
• PROBLEMS
• If we write out these changes on the actual
  balance sheet it will be very messy.
• If we just figure out the equation on a separate
  piece of paper as we have been doing, we will not
  be recording the changes properly.

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Accounting Equation

• We will now learn the concept of Debits and
  Credits.
• A L OE
• Which is the same as
• Left side Right side
• Which is the same as
• Debits Credits

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T-account

• A T-account is a method we can use to learn how
  to properly record any transaction that affects
  the balance sheet.
• A T-account is also a method we can use to learn
  about Debits and Credits.

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T-account

• A T-account looks like this
• Account Title
• Debit Credit
• (Left side) (Right side)
• Notice it has a left side and a right side, and
  the name of the account appears at the top of the
  T.
• We need one T-account for every account on the
  balance sheet.

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T-account Rules

• Accounts appearing on the left-hand side of the
  balance sheet have account balances on the left.
  (ASSETS)
• Accounts appearing on the right-hand side of the
  balance sheet have account balances on the right.
  (LIABILITIES OWNERS EQUITY)
• NOTE T-accounts are a very useful way to learn
  the rules of accounting but they are not used in
  real business situations. Once we have used them
  to master how to record transactions, we will
  study the actual way that businesses record
  transactions in their books. (In the next LAP.)

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SELF CHECK 1

• State whether the following accounts
  normally have account balances on the left or
  right-hand side of the balance sheet.
• Maria Sanchez, Capital
• Computer Equipment
• Office Furniture
• Accounts Payable
• Land
• After completing these questions, check your
  answers at the back of this L.A.P. If you got all
  the questions correct then move on to the next
  page. If you had some mistakes, review the
  previous information. When you feel like you
  understand
• the material, move on to the next
  page.

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T-account Rules

• Position of Opening Normal Balances
• A L OE
• Debit Credit
  Credit
• Examples
• Assets Liabilities
  Owners Equity
• Bank Account Accounts
  Judy Smith,
• Equipment Payable
  Capital
• Accounts Receivable
• Automobile

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Using the Rules

• The following are some transactions which are
  entered into
• T-accounts.
• Read over each transaction and each T-account
  entry to make sure
• you understand the rules mentioned on the
  previous pages.
• Sample Transaction 1
• Cassidy Meger invests 4,000 cash into her
  Barbie business. The money
• is put into the Bank account immediately.
• balance sheet
• Bank
  Capital
• 4,000
  4,000
• Note Bank is an
  asset account therefore, it has an opening
  balance
• on the
  left-hand side of the accounting equation and the
  T-account.
• 
  Capital is an Owners Equity account therefore,
  it has an opening
• balance
  on the right-hand side of the accounting equation
  and the
• T-account.
• 
  

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Using the Rules

• The balance sheet outline is shown to remind you
  that
• the accounts are part of the overall balance
  sheet for
• the business.
• Since Bank is an asset and appears on the
  left-hand side of the balance sheet, its balance
  goes on the left-hand side of its T-account.
• Since Capital is part of the Owners Equity and
  appears on the right-hand side of the balance
  sheet, its balance goes on the right-hand side of
  its T-account.

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Using the Rules

• Sample Transaction 2
• Cassidy bought new office furniture for her
  business for 6,200.
• She promised to pay for it in 30 days.
• The creditor is Fancy Furniture.
• balance sheet
• Office Furniture
  Accounts Payable
• 6,200
  6,200
• Note Furniture
  is an asset account therefore, it has an opening
  balance
• on the
  left-hand side of the accounting equation and the
  T-account.
• 
  Accounts Payable is a liability account
  therefore, it has an opening
• 
  balance on the right-hand side of the accounting
  equation and
• the T-account.

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T-account Rules

• Now that we have learned the correct position of
  opening normal balances using a T-account, we
  will learn when to use the terms Debit and Credit
  correctly when making changes to accounts.
• We will go back to the terms Increase and
  Decrease that we are familiar with already, into
  our T-accounts.

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T-account Rules

• 
  Owners
• Assets Liabilities
  Equity
• Increase Decrease Decrease Increase
  Decrease Increase
• Debit Credit Debit Credit
  Debit Credit
• NOTE
• An Increase to any asset account is considered a
  Debit whereas an Increase to any Liability or
  Owners Equity account is considered a Credit.
• A Decrease to any asset account is considered a
  Credit whereas a Decrease to any Liability or
  Owners Equity account is considered a Debit.

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DEBIT

• DEBIT refers to an entry on the left hand side of
  a T-account.

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CREDIT

• CREDIT refers to an entry on the right hand side
  of a T-account.

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SELF CHECK 2

• Circle the correct response for each statement
  below.
• T if the statement is True, or F if the statement
  is False.
• In a T-account, a Credit is found on the
  left-hand side.
• T F
• Notes Payable is considered an Asset account.
• T F
• An increase in an Asset account is also referred
  to as a Debit.
• T F
• A decrease to Owners Equity is considered a
  Credit.
• T F

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SELF CHECK 2 Continued

• The opening account balance of an account is
  found on the same side as where the account is
  found in the accounting equation.
• T F
• T-accounts are normally used in real business
  situations.
• T F
• In a T-account, a Debit is found on the left-hand
  side.
• T F
• If Accounts Payable was to increase in value by
  500, the entry would be recorded on the
  right-hand side of the T-account.
• T F
• Check the answer key at the back. If you
  answered all questions correctly then move on to
  the next section. If you had any incorrect
  responses then review the previous material
  and/or see your teacher
• for help.

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Using the Rules

• The following are increase and decrease
  transactions which are entered into T-accounts.
  Read over each transaction and each T-account
  entry to make sure you understand the rules
  mentioned on the previous pages.
• Sample Transaction 3
• Cassidy Meger paid Fancy Furniture the balance
  she owed them. She wrote out a cheque for 6,200.
• balance sheet
• Bank
  Accounts Payable
• 6,200
  6,200
• Note Accounts
  Payable decreases (debit) and Bank decreases
• 
  (credit).

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Using the Rules

• Sample Transaction 4
• Cassidy bought a new car for her business. Its
  cost was 20,000.
• She paid for it by cheque.
• balance sheet
• Bank
• 
  20,000
• Automobile
• 20,000
• Note Automobile
  increases (debit) and Bank decreases (credit).
• Both
  are asset accounts.

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Using the Rules

• Sample Transaction 5
• Cassidy borrowed 14,500 from the bank to buy
  new equipment for her business in the near
  future.
• balance sheet
• Bank
  Bank Loan
• 14,500
  14,500
• Note Bank
  increases (debit) and Bank Loan increases
  (credit).

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Table Form

• Another method that may help you remember when to
  Debit and when to Credit is using the table
  below.
• DEBIT
  CREDIT

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FINAL TEST

• INSTRUCTIONS
• This test consists of three sections and has a
  value of 45 marks.
• Section 1 True or False is worth 10 marks
• Section 2 Fill in the blank is worth 9 marks
• Section 3 Recording Transactions is worth 26
  marks.
• To properly test yourself, please refrain from
  looking
• back in the L.A.P. for help.
• GOOD LUCK !

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• Section 1 True or False Circle the correct
  response.
• Real businesses always record their business
  transactions in T-
• accounts.
• T F
• When an account appears on the right-hand side of
  a balance sheet, the balance in the T-account is
  on the right-hand side.
• T F
• Decreases to T-accounts are always made on the
  left-hand side.
• T F
• It is possible to have a transaction that affects
  only asset accounts.
• T F
• A Bank account normally has a credit balance.
• T F

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• Section 1 True or False (continued)
• Accounts Payable normally have a credit balance.
• T F
• Debit refers to an entry on the left-hand side of
  a T-account.
• T F
• Increases to an asset account are referred to as
  credits.
• T F
• When a creditor is paid by cheque, Accounts
  Payable should be debited.
• T F
• Accounts Receivable is a Liability account.
• T F

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• Section 2 Fill in the blank
• Indicate whether each of these accounts normally
  has
• a debit or credit balance.
• Accounts Payable 7. Land
• Supplies 8. Bank
• Truck 9.
  Furniture
• Bank Loan
• Cassidy Meger, Capital
• Accounts Receivable

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• Section 3 Recording Transactions
• On May 12, 2002, The Rock, Inc. had the Assets
  and
• Liabilities listed below. On a blank piece of
  paper you are required to
• Record the balances in T-accounts. (14 MARKS)
• Record the transactions in the same T-accounts.
  (12 MARKS)
• Assets Cash on Hand 535 Bank 7,800
• Accounts Receivable 2,552
  Equipment 4,900
• Liabilities Bank Loan 1,500 Accounts Payable
  400
• Owners Equity The Rock, Capital 25,000
• Transactions
• Owner invested 5,000 into the business. The
  money was deposited into
• the bank account.
• Bought new wrestling ring for 7,000 on account.
• Paid half the bank loan. Wrote a cheque.

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FINAL TEST

• Now that you have completed the test, please
  check the answers provided at the back of the
  L.A.P.
• If you scored at least 40 out of 45,
  !
• You have successfully completed the Theory
  behind
• DEBITS and CREDITS. You may now see your
  teacher to obtain your certificate of completion.
• If you were unable to
  score at least 40 out
• of 45, review the
  material and try the test
• again, and/or see your
  teacher for help!

Congratulations
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ANSWER KEY

• Pre-assessment
• F 5. T
• F 6. F
• F 7. T
• T 8. F
• Self Check 1
• Right 4. Right
• Left 5. Left
• Left

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ANSWER KEY (continued)

• Self Check 2
• F 5. T
• F 6. F
• T 7. T
• F 8. T
• Final Test Section 1
• F 6. T
• T 7. T
• F 8. F
• T 9. T
• F 10. F

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ANSWER KEY (continued)

• Final Test Section 2
• Credit 2. Debit 3. Debit 4.
  Credit 5. Credit
• Debit 7. Debit 8. Debit 9. Debit
• Final Test Section 3
• Cash on
  Accounts
• Hand Bank
  Receivable Equipment
• 535 7,800 750 (3)
  2,552 4,900
• (1) 5,000
  (2) 7,000
• 
  Accounts The Rock,
• Bank Loan
  Payable Capital
• (3) 750 1,500
  400 25,000
• 
  7,000 (2)
  5,000 (1)
  

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REFERENCES
Cougler, Ron. Revised Introductory Accounting.
Toronto John Wiley Sons,
1990. Additional information about Debits and
Credits can be found in the following
textbooks Accounting A Systems Approach. 3rd
Edition Kaluza/Howard/Abacher/Slywchuck 1991
McGraw-Hill Ryerson p. 75 Principles of
Accounting DAmico/Palmer 1987 Copp Clark Pitman
p. 79