Chapter 2: Debits and Credits
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Think through and record transactions (write sentences)
using T-accounts and journal entries.
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Debits and Credits
Every transaction (sentence in the story of what
happened to the money) has to have a debit and a credit.
Accounting professionals use T-accounts to help them
think through transactions and journal entries to record
them.
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Debits and Credits
In the pen and paper days all debit and credit
transactions were recorded as journal entries.
Today, computer programs like
do the journal entries for you in the background.
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Journal Entries & T-accounts
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Debit and Credit Cheat Sheet
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Debit and Credit Cheat Sheet
To use the cheat sheet you only have to figure
out two things.
•
•
Did you get or give away any money in
exchange for a good or service?
If you didn’t get or give away any money
in exchange for the good or service what
did you get or give away?
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TOTAL DEBITS always = TOTAL CREDITS
•
+ and – depict how an account behaves
•
increases or decreases NOT positive or negative
•
debits and credits can be assigned to multiple
accounts
•
total debits in the transaction
= total credits in the transaction
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Normal Balance
The type of balance, debit or credit, a particular
account is expected to have based on its account type.
• debit balance: asset, expense accounts
• credit balance: equity, liability, income accounts
Balance sheet account balances in QuickBooks are
normally positive. Exceptions are contra accounts.
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Deconstructing the Cheat Sheet
Assets
Debiting an asset account increases the
account balance.
Crediting an asset account decreases the
account balance.
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Deconstructing the Cheat Sheet
Liabilities & Equity
Debiting a liability or equity account decreases the
account balance.
Crediting a liability or equity account increases the
account balance.
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Deconstructing the Cheat Sheet
Income (Revenue)
Debiting an income account decreases the
account balance.
Crediting an income account increases the
account balance.
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Deconstructing the Cheat Sheet
Expenses & Cost of Goods Sold
Debiting an expense or COGS account increases the
account balance.
Crediting an expense or COGS account decreases the
account balance.
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Open a bank account with your parent’s money.
debit increases your bank account (current asset) balance
credits increase your liability (loan) and equity balances
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To record this transaction in QB make a deposit.
Banking: Make Deposits
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Buy tools.
debit increases your tools (fixed asset) balance
credit decreases your bank account(current asset) balance
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To record this transaction in QB write a check.
Banking: Write Checks
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Charge the tools to your credit card.
debit increases your tools (fixed asset) balance
credit increases your credit card (current liability) balance
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To record this transaction in QB enter a credit card charge.
Banking: Enter Credit Card Charges
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Pay the credit card bill.
debit decreases your credit card (current liability) balance
credit decreases your bank account (current asset) balance
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To record this transaction in QB write a check.
Banking: Write Checks
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Enter the bill from your tool vendor .
debit increases your tools (fixed asset) balance
credit increases your accounts payable balance
Terms
• net 30: due within 30 days
• 2% 10, net 30: 2% discount if paid within
10 days, due within 30 days
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To record this transaction in QB enter a bill.
Vendors: Enter Bills
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Pay the tool vendor’s bill.
debit decreases your accounts payable balance
credit decreases your bank account (current asset) balance
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To record this transaction in QB pay the bill.
Vendors: Pay Bills
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Invoice a customer.
debit increases your accounts receivable balance
credit increases your labor income balance
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To record this transaction in QB create an invoice.
Customers: Create Invoices
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Receive payment from the customer.
debit increases your undeposited funds balance
credit decreases your accounts receivable balance
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To record this transaction in QB receive payment against the customers account.
Customers: Receive Payments
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Make the deposit.
debit increases your bank account (current asset) balance
credit decreases your undeposited funds balance
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Select the payment for deposit.
Banking: Make Deposits
Unchecked amounts are undeposited funds (cash in transit).
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Make the deposit.
Banking: Make Deposits
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Inventory
• current asset
• does not become cost of goods sold until you
take it off the shelves (out of inventory) and
sell it to a customer
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Valuing Inventory:
•
LIFO (last in first out): last unit purchased (added to
inventory) is the first unit sold (to become COGS)
•
FIFO (first in first out): first unit purchased (added to
inventory) is first the unit sold (to become COGS)
•
Average Cost: computed by dividing the total cost of
units available for sale by the total number of units
available for sale
•
Standard Cost: the cost of a unit is set, any variance
from the set price is accrued (accumulated) in a variance
account
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QuickBooks Average Cost Calculation:
• average cost of an item is the total cost of items
currently in stock divided by the number of units
of the item in stock
• recalculated every time more units of the item
are purchased
• adds the cost of the new items to the cost of the
old stock and then divides by the total number of
new and old items
FIFO: Enterprise Solutions Advanced Inventory
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Quick Cost of Goods Sold calculation.
Beginning Inventory
+ Net Purchases
= Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
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Freight: Cost of Goods Sold
• freight in (FOB – freight or free on
board – shipping point): buyer pays
• freight out (FOB – freight or free on
board – destination point): seller pays
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Enter the parts bill from your vendor.
debit increases your inventory (current asset) balance
credit increases your accounts payable balance
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To record this transaction in QB enter a bill.
Vendors: Enter Bills
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Inventory becomes Cost of Goods Sold when it is
used on a job or sold to a customer.
debit increases your cost of goods sold balance
credit decreases your inventory (current asset) balance
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Selling inventory generates income.
debit increases your undeposited funds or A/R balance
credit increases your materials income balance
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Sell parts to a customer at the point of sale.
debit increases your undeposited funds balance
credit increases your materials income account balance
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To record this transaction in QB enter a sales receipt.
Customers: Enter Sales Receipts
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Use parts on a job.
debit increases your accounts receivable balance
credit increases your materials income account balance
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To record this transaction in QB create an invoice.
Customers: Create Invoices
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Now that you’ve gotten the idea. Practice working
through some transactions on your own.
Download the assignment and answer key PDF.
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