College
Accounting,
by Heintz and Parry
Chapter 3:
The Double Entry
Framework
Eddie was surprised at how many transactions
were occurring in his business, so he decided to use
a more advanced method of accounting that he had
learned about in class. He decided to use
T-accounts.
T-accounts look like a big T, and they give you a
chance to list additions to an account on one side and
subtractions on the other. The parts of a T-account
are:
Account Title
Debit side
Credit side
(Debit means
“left”)
(Credit means
“right”)
Eddie learned that what side of a balance sheet an
account is on determines whether the debit (left) side
or the credit (right) side is used for adding to the
account. Because assets are on the left side of a
balance sheet, you use the debit (left) side to add to
your asset accounts. Liabilities and capital are on the
right side of a balance sheet, so they increase on the
credit (right) side. You can picture it like this:
Assets = Liabilities + Capital
debit
+
credit
debit
credit
+
debit credit
+
There are 3 other types of accounts
that don’t show up on a balance sheet: Drawing, Revenues
and Expenses. Because these accounts are specific labels
for increases and decreases in capital, their plus side is the
side that would appropriately raise or lower capital. For
example, withdrawals decrease capital, so the plus side for
withdrawals should be the same as the minus side for capital,
which is the debit side:
Drawing
debit
+
credit
Questions: 1) Using this logic, which side would be the
plus side for revenues?
2) Which side would be the plus side for expenses?
Answers:
1) Revenues increase capital, so
revenues go up on the credit side, just like capital.
Revenues
debit
credit
+
2) Expenses decrease capital, so they go up on the debit
side:
Expenses
debit
+
credit
This means that three types of
accounts go up on the debit (left) side, or you can think of
them as +/- accounts:
Assets,
Withdrawals, and
Expenses.
The other three types go up on the credit (right) side, or
are -/+ accounts:
Capital,
Liabilities, and
Revenues.
Thus, those of you who know the debit accounts are
worthy of AWE, while those who also know the credit
accounts are even CooLeR.
Eddie’s first transaction in November was
to spend $120 to insure the instruments against theft or
damage for one year.
With t-accounts, the same rules apply: at least two
accounts change, and the accounting equation stays in
balance. In this case, the accounts involved are Cash and a
new account called Prepaid Insurance. Because the
insurance policy has a value for 1 full year, Prepaid
Insurance is an asset account, like cash is.
Questions:
1) Is cash increasing (+) or decreasing (-),
and should it get a debit or a credit?
2) Is Prepaid Insurance increasing (+) or decreasing (-), and
should it get a debit or a credit?
Answers:
with a credit.
1) Cash is decreasing, and assets decrease
2) Prepaid Insurance is increasing, and assets increase with a
debit.
+
Asset
_
+
Asset
-
debit
Cash
credit
debit
Prepaid Ins.
credit
Nov. 1 bal. 203
Nov. 5 120
Nov. 5
120
Note: we need to know where we were at the start of the month, so
Eddie wrote in beginning balances.
Next, Eddie bought some supplies that
he needed, things like heavy-duty tape (to keep people from
tripping on cables) and letterhead. Because of his good credit
rating, he got the $60 of supplies on account. As a result, he will
set up another new asset account called Supplies.
Questions: 1) Is the Supplies account increasing or
decreasing, and will it get a debit or a credit?
2) What other account (discussed in Chapter 2) will be
involved? What type of account (asset, revenue, etc.) is it? Is it
increasing or decreasing? Will it get a debit or a credit?
Answers:
1) Supplies are increasing, and assets
increase with a debit.
2) Accounts payable, a liability, is increasing, and liabilities
increase with a credit.
+
debit
Nov. 10
Asset
Supplies
60
-
credit
-
debit
Liability
+
Accts. Payable credit
Nov. 1 bal. 300
Nov. 10
60
The second gig for Eddie and the Losers wasn’t
playing for relatives! It was for friends, specifically a fraternity
where Eddie knew some guys. However, being friends, they
asked Eddie if they could pay him three weeks after the gig.
Since the fee was $300, he agreed.
The gig went well, especially after the guy who kept yelling
“Skynyrd” went home. A new t-account was needed, however:
Accounts Receivable, an asset account which represents the
right to receive money for a sale on account.
Questions: Once again, figure out:
Which two accounts changed?
What type of accounts are they?
Are they increasing or decreasing?
Do they get debits or credits?
Answers:
1) Accounts Receivable, an asset account,
is increasing, and assets increase with a debit.
2) Gig Revenue, a revenue account, is increasing, and
revenues increase with a credit.
+
debit
Nov. 17
Asset
Accounts Rec.
300
credit
debit
Revenue
Gig Revenue
+
credit
Nov. 1 bal. 225
Nov. 17
300
P.S. All of these transactions confirmed what Eddie learned
in accounting class: that every transaction involves
an equal dollar amount of debits and credits.
When November ended, Eddie didn’t do
financial statements, but he did do a Trial Balance: a list of all
accounts and their current balances. Doing a trial balance
provides reasonable assurance that an equal amount of debits
and credits were put into the t-accounts.
To do a trial balance, you must calculate the balance of your taccounts. This is done like this (using an example that has
nothing to do with Eddie’s business):
+
Asset
debit
Furniture
credit
Nov. 1 bal.
Nov. 8
220
450
670
Nov. 30 bal. 430
Nov. 6
Nov. 12
“footings”
difference between total debits and credits,
listed on the larger side
130
110
240
The band’s Trial Balance:
Eddie and the Losers
Trial Balance
For Month Ended November 30
Debits
Credits
Cash
83
Accounts Receivable
300
Supplies
60
Prepaid Insurance
120
Musical Instruments
2200
Accounts Payable
360
Eddie O’Hare, Capital
2000
Eddie O’Hare, Drawing
12
Gig Revenue
525
Musician Wage Expense
80
Sound Equip. Rent Exp.
30
_____
2885
2885
=====
=====
As Eddie documented transactions
in t-accounts, he developed two rules that helped him know
which account got the debit and which got the credit:
1: Many transactions involve cash, so remember
that cash in is a debit and cash out is a credit.
2: Of 6 types of accounts, 4 tend to get used on
only one side:
Drawing and
Expenses get
B
I
T
S
Capital and
Revenues get
E
D
I
T
S