College
Accounting
First Canadian Edition
Price • Haddock • Brock • Hahn • Reed
McGraw-Hill Ryerson
1
DEBITS AND CREDITS
2
OBJECTIVE 1
Define debit and credit.
3
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
OBJECTIVE 2
Describe the relationship
between debits and credits,
and the accounting equation.
5
AS WE ALREADY KNOW,
ASSETS = LIABILITIES + OWNER’S EQUITY
THE EQUATION MUST BALANCE:
LEFT = RIGHT
IN THE SAME WAY:
DEBITS = CREDITS
6
DOUBLE-ENTRY
ACCOUNTING
Every transaction must
have at least two parts.
DEBIT
CREDIT
7
WHERE TO RECORD
INCREASES AND DECREASES
ASSETS
= LIABILITIES + OWNER’S EQUITY
LEFT
RIGHT
ASSET ACCOUNTS
+
-
LIABILITY
OWNER’S EQUITY
ACCOUNTS
ACCOUNT
-
Record
Record
Record
increases
decreases
DEBIT
CREDIT
+
Record
-
+
Record
Record
decreases increases
decreases
increases
DEBIT
DEBIT
CREDIT
CREDIT
8
OBJECTIVE 3
Record transactions in the
General Journal.
9
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
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
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
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
20X5
Nov. 6 Cash
John Arrow, Capital
40,000.00
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.
13
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
14
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
20X5
Nov. 6 Cash
John Arrow, Capital
40,000.00
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
15
the transaction.
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
16
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
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
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.
18
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
20X5
Nov. 9 Equipment
Cash
10,000.00
10,000.00
Purchased equipment,
Cheque1002
19
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.)
20
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
20X5
Nov. 10 Equipment
Accounts Payable
5,000.00
5,000.00
Purchased equipment, on
credit from Organ, Inc.,
Invoice 2788, payable in 60
days
21
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.
22
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
20X5
Nov. 28 Supplies
Cash
1,000.00
1,000.00
Purchased supplies,
Cheque1003
23
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.
24
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
Page
DEBIT
1
CREDIT
20X5
Nov. 30 Accounts Payable
Cash
1,000.00
1,000.00
Paid Organ, Inc., on
account for Invoice 2788,
Cheque 1004
25
OBJECTIVE 4
Post transactions from the
General Journal to
T accounts.
26
LEDGER
• All accounts together are referred
to as a ledger.
• A record of final entry.
27
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
T ACCOUNTS
ASSETS
+
Record
Increases
DEBITS
LEFT SIDE
Record
Decreases
CREDITS
RIGHT SIDE
=
LIABILITIES
+
OWNER’S EQUITY
Record
Decreases
+
Record
Increases
Record
Decreases
+
Record
Increases
DEBITS
CREDITS
DEBITS
CREDITS
LEFT SIDE
RIGHT SIDE
LEFT SIDE
RIGHT SIDE
29
POSTING
• Transferring data from a journal to
a ledger.
30
GENERAL JOURNAL
DATE
Nov. 7
EXPLANATION
Prepaid Rent
Cash
POST.
REF.
Page
DEBIT
1
CREDIT
20,000.00
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
ACCOUNT BALANCE
• The difference between the
amounts recorded on the two sides
of an account.
• Computed by:
1. Adding the figures on each side
of the account.
2. Subtracting the smaller total
from the larger.
32
BALANCING AN ACCOUNT
Cash
+
(a) 40,000
(d) 20,000
(f) 10,000
(j) 1,000
(k) 1,000
32,000
Bal. 8,000
Footing
33
NORMAL BALANCES
ASSETS
+
Increase
(Normal
Balance)
Debits
Decrease
Credits
=
LIABILITIES
Decrease
Debits
+
Increase
(Normal
Balance)
Credits
+
OWNER’S EQUITY
Decrease
+
Increase
Debits
(Normal
Balance)
Credits
34
ASSETS
=
Cash
+
(a) 40,000 (d) 20,000
(f) 10,000
(j) 1,000
(k) 1,000
Bal. 8,000
32,000
(j)
Supplies
+
1,000
LIABILITIES
Accounts Payable
+
(l) 1,000 (h) 5,000
Bal. 4,000
Equipment
+
(e) 10,000
(g) 5,000
Bal.15,000
OWNER’S EQUITY
John Arrow, Capital
+
(b) 40,000
SUMMARY OF ACCOUNT BALANCES
ASSETS =
Prepaid Rent
+
(c) 20,000
+
8,000
1,000
20,000
15,000
44,000
LIABILITIES + OWNER’S EQUITY
4,000
=
4,000
40,000
+
40,000
35
ARROW EMPLOYMENT SERVICES
BALANCE SHEET
NOVEMBER 30, 20X5
Assets
Cash
Supplies
Prepaid Rent
Equipment
Total Assets
Liabilities
8,000.00 Accounts Payable
4,000.00
1,000.00
20,000.00
Owner’s Equity
15,000.00 John Arrow, Cap.
40,000.00
44,000.00 Total Liab.& O. E.
44,000.00
36
OBJECTIVE 5
Record transactions affecting
owner’s equity in the
general Journal.
37
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
OWNER’S EQUITY
Decrease
Side
Increase
Side
REVENUE
Decrease
Side
Increase
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
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
40
GENERAL JOURNAL
DATE
DESCRIPTION
20X5
Dec . 31 Cash
Fees Income
Performed services for
cash
POST .
REF.
Page__1__
DEBIT
CREDIT
10,500.00
10,500.00
31 Accounts Receivable
Fees Income
Performed services on
credit
3,500.00
31 Cash
Accounts Receivable
Received cash from credit
clients on account
1,500.00
3,500.00
1,500.00
41
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
GENERAL JOURNAL
DATE
DESCRIPTION
20X5
Dec . 31 Salaries Expense
Cash
Paid monthly salaries,
Cheques 1005 - 1006
31 Utilities Expense
Cash
Paid monthly bill for
utilities,
Cheque 1007
31 John Arrow, Drawing
Cash
Owner withdrew cash for
personal expenses,
Cheque 1008
POST .
REF.
Page__1__
DEBIT
CREDIT
2,500.00
2,500.00
300.00
300.00
1,000.00
1,000.00
43
OBJECTIVE 6
Prepare compound
journal entries.
44
COMPOUND ENTRIES
• Compound entries contain
several debits or several
credits.
• All debits are recorded first
followed by the recording of
credits.
45
GENERAL JOURNAL
DATE
DESCRIPTION
POST .
REF.
20X5
Dec . 31 Equipment
Cash
Accounts Payable
Purchased equipment on
credit from Organ, Inc.,
Invoice 2787, issued Cheque
1002 for a $5,000 down
payment; bal. due 30 days
Page__1__
DEBIT
CREDIT
10,000.00
5,000.00
5,000.00
10,000.00
10,000.00
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.
46
GENERAL JOURNAL
DATE
DESCRIPTION
20X5
Aug. 5 Office Equipment
Cash
Purchased equipment,
Cheque 6421
Sept. 1
Shop Equipment
Office Equipment
To correct error made in
Aug. 5 entry when a
purchase of shop
equipment was recorded
as office equipment
POST .
REF.
Page__15__
DEBIT
141
101
800.00
151
141
800.00
CREDIT
800.00
800.00
53
AUDIT TRAIL
• A chain of references that
makes it possible to trace
information through the
accounting system
54