Accounting Chapter 5 Teacher Notes

Rules of Debit and Credit Review

Assets

When you have more something, you add to the account balance. All asset accounts are on the LEFT side of the Accounting Equation increase with a DEBIT. These include:

Therefore, when you have less of an asset, you would reduce the account balance with a CREDIT.

Liabilities

Liabilities are your debts, or Account Payable. AP accounts are increased when you purchase something "on account." Liabilities are on the RIGHT side of the Accounting Equation and increase with a CREDIT.

You decrease your AP balance when you make a payment on the amount you owe. To decrease AP, use a DEBIT.

Capital

The balance of the Capital account shows the Owner's Equity in the business, or the amount of the business they own in dollars and cents. Capital is the difference between total assets and total liabilities.

Capital is on the RIGHT side of the Accounting Equation and increases with a CREDIT.

Revenue

Revenue = Sales or money the business make by selling its products and services. Revenue is on the RIGHT side the Accounting Equation and increases with a CREDIT (This is because Revenue is increasing Owner's Equity; the balance will be moved to the Capital Account at the end of the Accounting Cycle)

Expenses

These are the costs of doing business. The are on the RIGHT side of the Accounting Equation and increase with a DEBIT because they essentiallly reduce Owner's Equity in the business.

Expenses include:


Analyzing how transactions affect owner’s equity accounts:
To simplify the capital account, owner’s equity is split into separate accounts for sales, expenses, and owner transactions.

The Capital Account

When the owner deposits their personal funds into the business
     - capital increases; record a CREDIT

When the owner makes a withdrawal
     - capital decreases; record a DEBIT

The Sales Account

When the company makes a sale
     - capital increases; record a CREDIT

The Expense Account

Expenses (advertising, utilities, supplies, etc.)
    -  decrease owner’s equity; record a DEBIT


Recording Transactions:

Received Cash from owner as an investment: changes assets and OE (capital)
        Cash – increase (debit)
        Capital – increase (credit)

Paid cash for supplies: changes 2 asset accounts
        Supplies – increase (debit)
        Cash – decrease (credit)

Paid cash for insurance: changes 2 asset accounts
        Prepaid Insurance – increase (debit)
        Cash – decrease (credit)

Bought supplies on account: changes one asset and one liability account
        Supplies – increase (debit)
        Accounts Payable – increase (credit)

Paid cash on account: changes one asset and one liability account
        Accounts Payable – decrease (debit)
        Cash - decrease (credit)

Received cash from sales: changes assets and OE
        Cash – increase (debit)
        Sales – increases OE (credit)

Sold services on account: changes assets and OE
        Accounts Receivable – increase (debit)
        Sales – increases OE (credit)

Paid cash for an expense: changes one asset account and OE
        Expense – decreases OE (debit)
        Cash – decrease (credit)

Paid cash for an expense: changes one asset account and OE
        Expense – decreases OE (debit)
        Cash – decrease (credit)

Received cash on account: changes two asset accounts
        Cash – increase (debit)
        Accounts Receivable – decrease (credit)

Paid cash to owner for personal use: changes one asset account and OE
        Drawing – decreases OE (debit)
        Cash – decrease (credit)