Accounting for
Transactions
Transactions
• A business transaction is an event that occurs
that changes the financial position of a
business. These may happen on a daily basis
within a business.
Transactions
• The first rule of transactions
– Every transaction will affect 2 accounts
• Think of any purchase you make – you trade cash for
_______. (2 accounts affected)
• A long time ago – trade furs for building supplies (2
accounts affected)
– An economic ‘give’ and ‘take’ associated with the
operation of a business.
Transaction Examples
1)
2)
3)
4)
Paid cash for supplies
Paid $ owed to a creditor
Received $ from a debtor
Owner invests $ into the business
Transactions
• Steps in recording transactions
1. Determine which accounts are affected by the
transaction. (A,L,OE,R,E)
2. How much do the accounts change.
3. Decide whether the change is an increase or
decrease in the account.
4. Is the Equation still in Balance.
WHAT IS DEBIT AND CREDIT?
DEBIT AND CREDIT
• Debits and Credits are the accounting
terminologies which are used to describe the
increase or decrease in financial accounts
• Any movement in an account can be specified
as debits or credits
• DO NOT make the mistake of thinking debit
means increase and credit means decrease
– Debit and Credit means different a different thing
to different accounts
Debit and Credit
• We have a variety of accounts
– Some are called debit accounts
• This means that to increase the account we will debit it
– The others are called credit accounts
• Has to be one or the other
• To increase these accounts you will
credit it
• FOR EVERY TRANSACTION –
DEBITS MUST EQUAL CREDITS
(BALANCED!)
Debit and Credit
• T- Accounts
– Using T-Accounts to show the increase and
decrease of individual accounts
• The left represents a debit
• The right represents a credit
• ALWAYS THE SAME FOR EACH ACCOUNT
Debit and Credit
• We will start with our B/S accounts
– Assets
– Liabilities
– Owner’s Equity
• Remember the accounting
equation
Debit and Credit
• The left side of the equation is the left side of
our T-Account
– Assets are debit accounts
– To increase an asset’s total, we must debit it
– Also appear on the left side of the Balance Sheet
• The right side of the equation is the right side
of our T-Account
– Liabilities and Owner’s Equity are credit accounts
– To increase the totals, we must credit them
Debit and Credit
• Income Statement Accounts
– Revenues
– Expenses
• Think of these accounts in terms of owner’s
equity
– Which of the two add to the value of our business?
• We would credit that amount because Owner’s Equity is a
credit account
– Other way around if taking away from the value of the
business
• Revenues
– Credit Accounts
– Remember: Debit doesn’t mean good and Credit
doesn’t mean bad
• Expenses
– Takes away from the value of our business
– Therefore, is a debit account
Debit and Credit
• A trick I use to remember
• Think of a debit card vs. a credit card
• Debit Card – Taking from your cash in the bank
(ASSETS)
• Credit Card – Borrowing money with the
promise of future payment. (Liability)
T - Account
• Drawing a T – separates the debit side of an
account from the credit side
Debit
Credit
Assets
Liabilities
Expenses
Owner’s Equity
Revenue
T - Account
ASSETS
DEBIT
CREDIT
Will Increase the value of the
asset account
Will Decrease the Value of the
asset account
Ex. Receiving a building
Ex. Paying out cash
Liability
DEBIT
CREDIT
Will Decrease the Value of the
Liability
Will Increase the Value of the
Laibility
Ex. Paying off a creditor
Ex. Taking on more of a loan
OWNER’S EQUITY
DEBIT
CREDIT
Will decrease the Worth of the Will Increase the Worth Of the
business
Business
Ex. Employee steals cash from
the register
Ex. Initial Investment in the
Business
REVENUE
DEBIT
CREDIT
Will decrease the amount of
revenue received
Will Increase the amount of
Revenue made
- Rarely Happens
Ex. Making a sale
Ex. Giving back money made returns & refunds
EXPENSE
DEBIT
CREDIT
Will increase the amount of
expense
Will decrease the amount of
the expense
Ex. Paying Rent
-Rarely Happens
Ex. Getting a refund or rebate
Recording Transactions
• Example 1: Paid back a loan owing for $500.
• What 2 accounts are affected?
– Which account is debited?
– Which account is credited?
Recording Transactions
• Example 1: Paid back a loan owing for $500.
Cash (asset)
$500
Loan (Liability)
$500
Recording Transactions
• Example 2: Was paid $330 for services
performed.
• What accounts are affected?
– Debit?
– Credit?
Recording Transactions
• Example 2: Was paid $330 for services
performed.
Cash (asset)
$330
Service Revenue
$330
Recording Transactions
• Example 3: The Owner invests $5000 of his
own money in the business
• Which accounts are affected?
– Debit?
– Credit?
Recording Transactions
• Example 3: The Owner invests $5000 of his
own money in the business
Cash (asset)
$5000
Owner’s Equity
$5000
PRACTICE MAKES PERFECT!
• Complete Transaction Handout using the TAccounts provided
ACCOUNT
TO INCREASE
TO DECREASE
Assets
Debit
Credit
Liabilities
Credit
Debit
Capital
Credit
Debit
Revenues
Credit
Debit
Expenses
Debit
Credit