Chapter 2: Debits and Credits
Think through and record transactions (write sentences) using T-accounts and journal entries.
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.
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.
Journal Entries & T-accounts
Debit and Credit Cheat Sheet
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?
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
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.
Deconstructing the Cheat Sheet
Assets
Debiting an asset account increases the account balance.
Crediting an asset account decreases the account balance.
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.
Deconstructing the Cheat Sheet
Income (Revenue)
Debiting an income account decreases the account balance.
Crediting an income account increases the account balance.
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.
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
To record this transaction in QB make a deposit.
Banking: Make Deposits
Buy tools.
debit increases your tools (fixed asset) balance
credit decreases your bank account(current asset) balance
To record this transaction in QB write a check.
Banking: Write Checks
Charge the tools to your credit card.
debit increases your tools (fixed asset) balance
credit increases your credit card (current liability) balance
To record this transaction in QB enter a credit card charge.
Banking: Enter Credit Card Charges
Pay the credit card bill.
debit decreases your credit card (current liability) balance credit decreases your bank account (current asset) balance
To record this transaction in QB write a check.
Banking: Write Checks
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
To record this transaction in QB enter a bill.
Vendors: Enter Bills
Pay the tool vendor’s bill.
debit decreases your accounts payable balance
credit decreases your bank account (current asset) balance
To record this transaction in QB pay the bill.
Vendors: Pay Bills
Invoice a customer.
debit increases your accounts receivable balance credit increases your labor income balance
To record this transaction in QB create an invoice.
Customers: Create Invoices
Receive payment from the customer.
debit increases your undeposited funds balance credit decreases your accounts receivable balance
To record this transaction in QB receive payment against the customers account.
Customers: Receive Payments
Make the deposit.
debit increases your bank account (current asset) balance credit decreases your undeposited funds balance
Select the payment for deposit.
Banking: Make Deposits
Make the deposit.
Banking: Make Deposits
• 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
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
Valuing Inventory:
• 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
QuickBooks Average Cost Calculation:
FIFO: Enterprise Solutions Advanced Inventory
Quick Cost of Goods Sold calculation.
Beginning Inventory + Net Purchases
= Cost of Goods Available for Sale - Ending Inventory
= 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
Freight: Cost of Goods Sold
Enter the parts bill from your vendor.
debit increases your inventory (current asset) balance credit increases your accounts payable balance
To record this transaction in QB enter a bill.
Vendors: Enter Bills
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
Selling inventory generates income.
debit increases your undeposited funds or A/R balance credit increases your materials income balance
Sell parts to a customer at the point of sale.
debit increases your undeposited funds balance
credit increases your materials income account balance
To record this transaction in QB enter a sales receipt.
Customers: Enter Sales Receipts
Use parts on a job.
debit increases your accounts receivable balance
credit increases your materials income account balance
To record this transaction in QB create an invoice.
Customers: Create Invoices