Welcome to Accounting 101 Today’s topic is recording transactions using Debits and Credits My name is Samreen Manjra and I am a Certified Public Accountant Accounting is about organizing, recording, presenting, and analyzing financial information. We first start with the basic accounting equation, which is assets equals liabilities plus equity. Assets are the resources a company owns such as cash, inventory, computers and buildings. Liabilities are the amounts owed to others including the bills the company has to pay, which is referred to as accounts payable as well any loans, or notes payable.
Common Stock and Retained Earnings
Equity represents the owners claim to the business which can be further broken-down into common stock and retained earnings. Retained earnings includes a total prior and current revenues earned, minus expenses incurred and minus dividends paid. We utilize the accounting concepts of debits and credits in order to create journal entries. Journalizing is the process of recording accounting transactions. When we increase one side of the accounting equation, we would also increase the other side. When we increase assets, we would debit an asset account. When we increase liabilities, we will credit a liability account. When we increase equity we will credit an equity account. For example, on April 1, Company A obtains ten thousand dollars cash by obtaining a loan. Since the Company’s cash balance increased by
ten thousand dollars, we would debit, cash which is an asset account.
Company Increased Liabilities
In order to obtain that loan, the company increased its liabilities by ten thousand dollars therefore, we would credit notes payable. please note that when we depict this transaction in the accounting equation, it balances out. The journal entry starts by recording April 1st, the date of the transactions, on the left side. We will debit the cash account and this is written first in the account description column. The thousand-dollar amount is now is included in the debit column.
Then we will credit the notes payable account. The thousand-dollar liability amount is included in the credit column. A short description is provided underneath. The journal entry format includes the the debit account name and amount written on the left side of each column and the credit account name and amount written on the right side of each column. How do we know whether to debit or credit an account? this question brings us back to the accounting equation. When we increase out assets, this means we are also increasing our liabilities or equity.
Liability Account or Equity Account
Therefore, when we increase an asset, this is a debit. A liability account or an equity account would have a
credit. When assets are decreasing, we credit the asset account and debit either the liability account or equity account. As previously discussed, equity consists of common stock and retained earnings, therefore, we have to think about the impacts of the transactions to the equity account as a whole.
An increase in common stock or revenues increases equity, therefore is a credit. An increase in expenses or dividends decreases equity, therefore is a debit. Theopposite relationships hold true for for decreases in equity. Here is another example On April 5, Company A buys four thousand dollars of inventory on account and on April 10 the company pays the suppliers the four
thousand dollars owed.
We start the journal entry by recording the April 5th transaction. We debit the inventory account because there’s a four thousand dollar increase in assets and credit the accounts payable liability account because we owe money to the supplier. If the supplier is paid on April 10th, we would debit Accounts payable since we decrease our liability, and credit cash work. Now that we have discussed the basic debit and credit concept, my recommendation is to practice applying the concepts and preparing journal entries. Please post any questions or comments you may have and thank you for taking the time to view this video!.