Recording Transactions using
Debit & Credit Approach
Service Company Example
The current presentation will cover the basics of recording transactions using the Debit & Credit approach. It may
take a little time to get used to thinking in terms of debits and credits. You will need to lose any preconceived
ideas about the meaning of the terms Debit and Credit. They are in fact meaningless unless one knows what type
of account (e.g., asset, liability) is being debited or credited. You will also want to keep in mind that for any
transaction, and all transactions taken together, that debits must always equal credits just like assets must always
equal the sum of liabilities and equity.
We will use the same transactions as used in the Mike’s Barbershop example. This will be done in order to remind
you of the meaning of the debits and credits for the financial statements. A couple of initial slides will be devoted
to the basics of debits and credits.
(1) ASSETS
To Demonstrate an Increase in Assets → DEBIT the asset account
To Demonstrate a Decrease in Assets → CREDIT the asset account
(2) LIABILITIES
To Demonstrate an Increase in Liabilities → CREDIT the liability account
To Demonstrate a Decrease in Liabilities → DEBIT the liability account
(3) EQUITY
To Demonstrate an Increase in Equity → CREDIT the equity account
To Demonstrate a Decrease in Equity → DEBIT the equity account
Notice, the rules for debiting & crediting an equity account also show the rule for income statement accounts. If
you recall that the revenues and expenses get incorporated into the retained earnings account within the equity
portion of the balance sheet, then we have the following rules.
To Demonstrate an Increase in Net Income (e.g., Revenue) → CREDIT revenue
To Demonstrate a Decrease in Net Income (e.g., Expense) → DEBIT expense
The following slide summarizes these relationships with (+) for increase (-) for decrease.
ASSETS
(+)
DEBIT
=
(-)
CREDIT
Assets: (e.g.,)
Cash & Cash Equivalents
Marketable Securities
Accounts Receivable
Inventory
Prepaid Expenses
Prepaid insurance
Other Current Assets
Pre-Paid Expenses
Property, Plant, & Equipment (PPE)
Land
Buildings
Less Accumulated Depreciation
Intangibles
Goodwill
Patents
Copyrights
Less Accumulated Amortization
Other Long-Term Assets
LIABILITIES
(-)
DEBIT
+
OWNERS’ EQUITY
(+)
(-)
CREDIT
DEBIT
(+)
CREDIT
Dividends
Capital Stock
Retained Earnings
EXPENSES
REVENUE
Liabilities: (e.g.,)
Accounts Payable
Wages Payable
Utilities Payable
Interest
Current portion of L-T debt
Accrued Expenses
Salaries
Unearned Revenue
Other Current Liabilities
Notes payable
Mortgages payable
Bonds Payable
Other Long-Term Liabilities
Expenses: (e.g.,)
Cost of Goods Sold
Selling expenses
General & Administrative
Salaries
Wages
Interest
Taxes
Depreciation & Amortization
Revenue: (e.g.,)
Revenue
Sales
Net Sales
Interest
1. Mike transfers $500 from the shop’s savings account to its checking account.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
1. Mike transfers $500 from the shop’s savings account to its checking account.
Balance Sheet
ASSETS
=
LIABILITIES
+
Income Statement
EQUITY
REVENUE
-
EXPENSES
= NET INCOME
+500 Cash
- 500 Savings
Account
Cash
Savings Account
Debit
Credit
500
500
2. Mike purchases $100 worth of equipment (e.g., scissors, clippers, etc.) for the shop by writing a check.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
2. Mike purchases $100 worth of equipment (e.g., scissors, clippers, etc.) for the shop by writing a check.
Balance Sheet
ASSETS
=
LIABILITIES
+
Income Statement
EQUITY
REVENUE
-
EXPENSES
= NET INCOME
+100
Equipment
-100 Cash
Account
Equipment
Cash
Debit
Credit
100
100
3. Mike purchases a blow dryer for the shop. The dryer costs $50. Mike has asked the seller to bill him for the
dryer.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
3. Mike purchases a blow dryer for the shop. The dryer costs $50. Mike has asked the seller to bill him for the
dryer.
Balance Sheet
ASSETS
=
LIABILITIES
+
Income Statement
EQUITY
REVENUE
-
EXPENSES
= NET INCOME
+ 50 Accounts
+50 Equipment Payable
Account
Equipment
Accounts Payable
Debit
Credit
50
50
4. Mike receives the bill for the purchase of the dryer and immediately pays it by putting a check in the mail for
the full amount.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
4. Mike receives the bill for the purchase of the dryer and immediately pays it by putting a check in the mail for
the full amount.
Balance Sheet
ASSETS
-50 Cash
=
LIABILITIES
+
EQUITY
REVENUE
-
EXPENSES
= NET INCOME
-50 Accounts
Payable
Account
Accounts Payable
Cash
Income Statement
Debit
Credit
50
50
5. Mike provides a $15 haircut to a customer that pays cash.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
5. Mike provides a $15 haircut to a customer that pays cash.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Revenue
EQUITY
+15 Retained
Earnings
+15 Cash
Cash
Income Statement
REVENUE
-
EXPENSES
15
= NET INCOME
15
Debit
Credit
15
15
Notice here that we do not actually credit retained earnings directly. Rather, the credit to retained earnings (and,
equity more broadly) is implied by the credit of the revenue account. In actual fact, a business would ‘close’ the
revenue account into the retained earnings account just prior to constructing their financial statements. We’ll talk
more about closing accounts later, for now note that the same will be true for expenses.
6. Mike provides a $20 haircut to a customer. The customer – a loyal and steady one for Mike – has asked Mike
to bill him for the haircut.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
6. Mike provides a $20 haircut to a customer. The customer – a loyal and steady one for Mike – has asked Mike
to bill him for the haircut.
Balance Sheet
ASSETS
=
LIABILITIES
+
+20 Accounts
Receivable
EQUITY
+20 Retained
Earnings
Account
Accounts Receivable
Revenue
Income Statement
REVENUE
-
EXPENSES
20
= NET INCOME
20
Debit
Credit
20
20
7. Mike receives a $20 check from the customer in question 6.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
7. Mike receives a $20 check from the customer in question 6.
Balance Sheet
ASSETS
=
LIABILITIES
+
Income Statement
EQUITY
REVENUE
-
EXPENSES
= NET INCOME
+20 Cash
-20 Accounts
Receivable
Account
Cash
Accounts Receivable
Debit
Credit
20
20
8. Mike pays $400 in rent to the owner of his building.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
8. Mike pays $400 in rent to the owner of his building.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Cash
EQUITY
REVENUE
- 400 Retained
Earnings
-400 Cash
Rent Expense
Income Statement
-
EXPENSES
400
Debit
= NET INCOME
- 400
Credit
400
400
9. Mike receives his $200 utility bill. However, he does not plan to actually pay this until next month (after he
constructs this period’s financial statements).
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
9. Mike receives his $200 utility bill. However, he does not plan to actually pay this until next month (after he
constructs this period’s financial statements).
Balance Sheet
ASSETS
=
LIABILITIES
+
+200 Accounts
Payable
Account
Utility Expense
Accounts Payable
Income Statement
EQUITY
REVENUE
-200 Retained
Earnings
-
EXPENSES
200
Debit
= NET INCOME
-200
Credit
200
200
10. Mike receives a $5,000 small business loan from his bank.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
10. Mike receives a $5,000 small business loan from his bank.
Balance Sheet
ASSETS
=
+5,000 Cash
LIABILITIES
+
Income Statement
EQUITY
REVENUE
-
EXPENSES
= NET INCOME
+5,000 Bank
Loan
Account
Cash
Bank Loan (or, Long-term Debt)
Debit
Credit
5,000
5,000
11. Mike makes the first payment of $300 on his bank loan. Of the entire payment, $200 will go towards the
principal of the loan and $100 towards interest on the loan.
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
11. Mike makes the first payment of $300 on his bank loan. Of the entire payment, $200 will go towards the
principal of the loan and $100 towards interest on the loan.
Balance Sheet
ASSETS
=
-300 Cash
LIABILITIES
+
- 200 Bank
Loan
Account
Income Statement
EQUITY
REVENUE
-100 Retained
Earnings
-
EXPENSES
100
Debit
- 100
Credit
Bank Loan
200
Interest Expense
100
Cash
= NET INCOME
300
12. The $50 blow dryer that Mike purchased way back in question 3 has worn out completely (it is now worthless
with no salvage value at all).
Balance Sheet
ASSETS
=
LIABILITIES
+
Account
Income Statement
EQUITY
REVENUE
Debit
-
EXPENSES
= NET INCOME
Credit
12. The $50 blow dryer that Mike purchased way back in question 3 has worn out completely (it is now worthless
with no salvage value at all).
Balance Sheet
ASSETS
=
LIABILITIES
+
EQUITY
REVENUE
-50 Retained
Earnings
- 50 Equipment
Account
Depreciation Expense
Equipment
Income Statement
-
EXPENSES
50
= NET INCOME
- 50
Debit
Credit
50
50