Accounting for Transactions. Transactions A business transaction is an event that occurs that changes the financial position of a business. These may.

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) Paid cash for supplies2) Paid $ owed to a creditor3) Received $ from a debtor4) Owner invests $ into the business

Transactions

• Steps in recording transactions1. 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)

Debit Credit

Assets

Expenses

Liabilities

Owner’s Equity

Revenue

T - Account

• Drawing a T – separates the debit side of an account from the credit side

T - Account

ASSETS

DEBIT CREDIT

Will Increase the value of the asset account

Ex. Receiving a building

Will Decrease the Value of the asset account

Ex. Paying out cash

Liability

DEBIT CREDIT

Will Decrease the Value of the Liability

Ex. Paying off a creditor

Will Increase the Value of the Laibility

Ex. Taking on more of a loan

OWNER’S EQUITY

DEBIT CREDIT

Will decrease the Worth of the business

Ex. Employee steals cash from the register

Will Increase the Worth Of the Business

Ex. Initial Investment in the Business

REVENUE

DEBIT CREDIT

Will decrease the amount of revenue received

- Rarely Happens

Ex. Giving back money made -returns & refunds

Will Increase the amount of Revenue made

Ex. Making a sale

EXPENSE

DEBIT CREDIT

Will increase the amount of expense

Ex. Paying Rent

Will decrease the amount of the expense

-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) Loan (Liability)

$500 $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) Service Revenue

$330 $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) Owner’s Equity

$5000 $5000

PRACTICE MAKES PERFECT!

• Complete Transaction Handout using the T-Accounts provided

ACCOUNT TO INCREASE TO DECREASEAssets Debit Credit

Liabilities Credit Debit

Capital Credit Debit

Revenues Credit Debit

Expenses Debit Credit