If you thought you we're going to be able to sit back and relax on the beach, I'm sorry to disappoint you. I'm the only one currently entitled to this luxury (I already know bookkeeping but you're getting there). Let's reflect a little on what we've covered so far. In the Introduction we discussed the types of business organizations, types of business activities, users of financial information, bookkeeping systems, accounting rules, and the cash and accrual basis of accounting. Lesson 1 introduced you to some of the terminology and definitions used in the accounting and bookkeeping language. Lesson 2 explained Property & Property Rights, the Accounting Equation, double entry bookkeeping, and how business transactions affect the equation. Lesson 3 introduced and explained Debits and Credits and how they affect the Accounting Equation and are used to record business transactions. If you feel you need a refresher on any of these topics now would be a good time to review any prior lessons before continuing on. Introduction Lesson 1 Lesson 2 Lesson 3 Under the light again to see what stuck to your many brain cells. I'm a firm believer in "show me", so let's see what you know at this time. Basic Accounting Review Quiz Even if you did well on the review quiz and feel fairly comfortable with the material that has already been presented, a quick review of some of the prior material will be beneficial for understanding the material presented in this lesson. Type Of Accounts In prior lessons, we mainly used "The Big Three" (Assets, Liabilities, and Owner's Equity) and "Ma Capital's (Owners Equity) Kids" (Revenue, Expense, Investment, and Draws) as our "accounts" to learn how business transactions affect account balances. These seven "big" type of accounts were defined in Lesson 1 as follows: Assets Formal Definition:The properties used in the operation or investing activities of a business. Informal Definition:All the good stuff a business has (anything with value). The goodies. Liability Formal Definition:Claims by creditors to the property (assets) of a business until they are paid. Informal Definition:Other's claims to the business's stuff. Amounts the business owes to others. Owner's Equity also called Owner's Capital Formal Definition:The owner's rights to the property (assets) of the business; also called proprietorship and net worth. Informal Definition:What the business owes the owner. The good stuff left for the owner assuming all liabilities (amounts owed) have been paid. "Ma Capital's (Owner's Equity) Four Kids" Revenue Formal Definition:The gross increase in owner's equity resulting from the operations and other activities of the business. Informal Definition:Amounts a business earns by selling services and products. Amounts billed to customers for services and/or products. Expense Formal Definition:Decrease in owner's equity resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business. Informal Definition:The costs of doing business. The stuff we used and had to pay for or charge to run our business. Draws Formal Definition: Decrease in owner's equity resulting from withdrawals made by the owner. Informal definition: Amounts the owner withdraws from his business for living and personal expenses. Owner's Investments Formal Definition: Increase in owner's equity (capital) resulting from additional investments of cash and/or other property made by the owner. Informal definition: Additional amounts, either cash or other property, that the owner puts in his business. In the real bookkeeping world, we want to know the detail types of assets, liabilities, equity (capital), revenues, expenses, and draws. In Lesson 1 we discussed some of the detail types of assets, liabilities, equity, revenue, and expenses. Can You name a few ? I'll help you. Examples of Assets-Cash, Accounts Receivable, Notes Receivable, Buildings, and Equipment Examples Of Liabilities-Accounts Payable, Notes Payable, and Mortgage Payable Examples Of Revenue-Product Sales, Rental Income, and Service Revenue Examples Of Expenses-Employee Wages, Building Rental, Telephone, Utilities, Advertising, Office Supplies Rules for Debits and Credits that we will use in this lesson were just covered in Lesson 3. If you've slept since then, the following procedure is what you use in order to use and apply the Debit and Credit Rules when recording bookkeeping transactions. All You Need To Know About Debits and Credits Summarized In One Sentence: Enter an amount in the Normal Balance Side of an Account to Increase the Balance of an Account and in the Opposite Side of an Account to Decrease the Balance of an Account. Additional Clarification: Since Assets, Draw, and Expense Accounts normally have a Debit Balance, in order to Increase the Balance of an Asset, Draw, or Expense Account enter the amount in the Debit or Left Side Column and in order to Decrease the Balance enter the amount in the Credit or Right Side Column. Likewise, since Liabilities, Owner's Equity (Capital), and Revenue Accounts normally have a Credit Balance in order to Increase the Balance of a Liability, Owner's Equity, or Revenue Account the amount would be entered in the Credit or Right Side Column and the amount would be entered in the Debit or Left Side column to Decrease the Account's Balance. How To Use and Apply The Debit and Credit Rules: (1) Determine the type of account(s) the transactions affect-asset, liability, revenue, or expense account. (2) Determine if the transaction increases or decreases the account's balance. (3) Apply the debit and credit rules based on the type of account and whether the balance of the account will increase or decrease. Let's revisit another definition and term that was defined in Lesson 1 and discussed in Lesson 3. Account-a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period. Any of these or any others that our business needs or wants to track have their own separate and individual account. What officially do we call this detail listing of accounts that we set up for our business ? Simply a Chart Of Accounts. In this lesson and future lessons we are going to stray away from analyzing and recording transactions using the "Big Accounts" and start using the detail accounts to record and analyze our business transactions. Let's take a step in this direction by setting up a simple chart of accounts for ABC Mowing. Simple Chart Of Accounts For ABC Mowing Assets Account Name:Cash Description:Currency and checks and balance in bank Account Name:Accounts Receivable Description:Amounts due from customer's for services rendered Account Name:Inventory-Office Supplies Description:On hand supplies of such items as copier & computer paper, pens, pencils and other office supplies Account Name:Mowing Equipment Description:Mowers purchased Liabilities Account Name:Accounts Payable Description:Amounts owed suppliers for business purchases and expenses Account Name:Note Payable-Bank Description:Mortgages and loans owed to bank Equity Account Name:Owner's Capital Description:Amounts invested by owner and earned by operations Account Name:Owner's Draws Description:Amounts withdrawn by owner for personal expenses Revenue Account Name:Mowing Revenues Description:Earnings from mowing yards Expenses Account Name:Advertising Expense Description:Expenditures for TV, radio, newspaper, and other promotions. Account Name:Mulch Expense Description:Expenditures for mulch used for yard work In order to record the information in our accounts, we also need to be familiar with the source documents that provide us with the necessary information for recording our transactions. Source Documents The original sources of information that provide documentation (proof) that a transaction has occurred are sales invoices (tickets), invoices from suppliers, contracts, checks written and checks received , promissory notes, and various other types of business documents. These documents provide us with the information needed to record our financial transactions in our bookkeeping records. Typical Types Of Business Transactions   and the Debits and Credits and Accounts Used To Record Them In a typical business transaction we get something and we give up something. Sale-Sell goods and/or services Cash Sale-customer pays at the time of sale The business gets cash or a check from their customer and gives up a product or service to their customer. Accounts Used: Debit: Cash    Credit: Sales On Account Sale-business allows the customer time to pay The business gets a promise to pay from their customer and gives up a product or service to their customer. Accounts Used: Debit: Accounts Receivable    Credit: Sales Purchase goods and/or services Cash Purchase-business pays the supplier at the time of purchase The business gets a product or service from their supplier and gives up cash or a check to their supplier. Accounts Used: Debit: Expense or Inventory Account    Credit: Cash On Account Purchase-supplier allows the business time to pay The business gets a product or service from a supplier and gives up a promise to pay to their supplier. Accounts Used: Debit: Expense or Inventory Account    Credit: Accounts Payable Pay Supplier Charge Purchases -pay suppliers for products and/or services that we promised to pay for later (charge). The business gets the amount of their promise to pay the supplier reduced and gives up cash or a check. Accounts Used: Debit: Accounts Payable    Credit: Cash Receive Customer Charge Payments -receive payments from a customer that promised to pay us later (charge sale). The business gets cash or a check from their customer and gives up (reduces the amount of) their customer's promise to pay. Accounts Used: Debit: Cash    Credit: Accounts Receivable Borrow Money (Loans) The business gets cash or equipment and gives up a promise to pay. Accounts Used: Debit: Cash or Equipment    Credit: Note Payable Repay a Loan The business gets the amount of their promise to pay reduced and gives up cash or a check. Accounts Used: Debit: Note Payable    Credit: Cash Draw The business gets the owner's claim to the business assets reduced and gives up cash or a check. Accounts Used: Debit: Owner's Draw    Credit: Cash Payroll (not covered in this tutorial) The business gets services from their employees and gives up a check. Accounts Used: Debit: Salary & Wages Expense    Credit: Cash T-Accounts We're going to record our transactions using our ole buddy the T-Account. Notice that Assets, Draws, and Expense Type of Accounts are increased using the Left Side (Column) of the account (debited) and decreased using the Right Side (Column) of the account (credited). The reverse is true for the Liability, Equity, and Revenue Type of Accounts. These Type Of Accounts are increased using the Right Side (Column) of the account (credited) and decreased using the Left Side (Column) of the account (debited). Asset Accounts Account Name Increase Decrease Debit Credit Left Side or Debit Side of Account Right Side or Credit Side of Account                   Liability Accounts Account Name Decrease Increase Debit Credit Left Side or Debit Side of Account Right Side or Credit Side of Account                 Equity (Capital) Accounts Account Name Decrease Increase Debit Credit Left Side or Debit Side of Account Right Side or Credit Side of Account                   Revenue Accounts Account Name Decrease Increase Debit Credit Left Side or Debit Side of Account Right Side or Credit Side of Account                 Expense Accounts Account Name Increase Decrease Debit Credit Left Side or Debit Side of Account Right Side or Credit Side of Account                   Draw Accounts Account Name Increase Decrease Debit Credit Left Side or Debit Side of Account Right Side or Credit Side of Account                 Now, I think we should be ready to revisit our ABC Mowing Company and record the transactions presented in prior lessons in our detailed accounts (T-Accounts). We are going to assume that ABC has beginning balances already recorded in their accounts. We are going to assume that ABC has balances already recorded in their accounts. These balances are as of December 1, xxxx. Note: If these balances were as of the beginning of the year the nominal or temporary accounts - revenues, expenses, and draws would all have zero balances. Lastly, we are going to thoroughly review each transaction for December xxxx and show you the hows and whys to properly recording each transaction and present the steps for properly analyzing and recording a transaction. ABC's Beginning Account Balances as of December 1, xxxx Assets Liabilities Equity Cash $5,500 Dr Accounts Receivable $1,600 Dr Mowing Equipment $2,500 Dr Inventory-Office Supplies $ 0 Dr Accounts Payable $2,000 Cr Owner's Capital $7,500 Cr Mowing Revenue $1,000 Cr Advertising Expense $200 Dr Mulch Expense $100 Dr Owner Draws $600 Dr Notice I used the symbols Dr and Cr to abbreviate the Debit and Credit balances in the table of ABC's beginning balances. While this is a common method of representing debits and credits, other symbols that we discussed in Lesson 3 are also used. You'd better check me out to see if our books balance before we start recording ABC's transactions. We're going to perform two checks that relate to what we've been learning in prior lessons. The first check is to see if our Accounting Equation balances and the second to make sure that the debit balances equal the credit balances. Equation Check Calculations Total Assets = Cash + Accounts Receivable + Mowing Equipment Total Assets = 5,500 + 1,600 + 2,500 Total Assets = 9,600 Total Liabilities is easy because there is only one account (Accounts Payable) with a balance of 2,000. Total Liabilities = 2,000 Total Equity = Owner's Capital + Revenues - Expenses - Draws Since we have more than one expense let's summarize them before we use them in our equation. Total Expenses = Mulch Expense + Advertising Total Expenses = 100 + 200 Total Expenses = 300 Total Equity = Owner's Capital + Revenues - Expenses - Draws Total Equity = 7,500 + 1000 - 300- 600 Total Equity = 7,600 Substituting our totals into the Accounting Equation we find that our equation balances. Assets = Liabilities + Owner's Equity 9,600 2,000 7,600 Our second check is to see if our debit account balances equal our credit account balances. Let's total our Debit Balances Cash 5,500 Accounts Receivable 1,600 Mowing Equipment 2,500 Advertising Expense 200 Mulch Expense 100 Owner's Draw 600    Total Debits 10,500 Now we'll total our Credit Balances Accounts Payable 2,000 Owner's Capital 7,500 Mowing Revenue 1,000    Total Credits 10,500 It looks like we passed muster again. ABC Transactions Let's revisit that mowing business once again. This time we're going to record our transactions using our detail type of accounts such as Cash, Accounts Receivable, Mowing Equipment, Mowing Revenues, etc. to record our transactions. Navigation: Interactive Links are provided in this table. Click on the Underlined Transaction Number Link (1,2,3,etc.) to go to the Detailed Information Pertaining to the Transaction. 1. ABC mows a client's yard and receives a check from the customer for $50 for the service provided. 2. ABC purchases $100 worth of office supplies and stores them in their storage room. The office supply store gives them an invoice that allows them to pay for them in 15 days (on account). 3. ABC places an ad in the local newspaper receives the invoice from the supplier and writes a check for $25 to the newspaper. 4. ABC purchases five mowers for $10,000 and finances them with a note from the local bank. 5. ABC mows another customer's yard and sends the customer a $75 bill (invoice) for the service they performed. They allow their customer ten (10) days to pay them for this service (on account). 6. The owner of ABC needs a little money to pay some personal bills and writes himself a check for $500. 7. ABC pays the office supply company $100 with a check for the office supplies that they charged (promised to pay). 8. ABC receives a check from the customer who they billed (invoiced) $75 for services and allowed 10 days to pay. 9. ABC purchased some mulch for $60 and received an invoice from their supplier who allows them 15 days to pay. The mulch was used on a customer's yard. 10. ABC bills (prepares an invoice) the customer $80 for the mulch and mowing his yard and receives a check for $80 from the customer. We will discuss each transaction and "post" the entry to the appropriate account (T-Account). Keep in mind that each entry will have a debit and a credit. In your actual formal General Ledger, which will be discussed and explained in Lesson 5, each account has an amount column for debits (left side or first column) and an amount column for credits (right side or second column). Detail Transaction Information Navigation: Interactive Links are included for each transaction that return you to the List Of Transactions. Click On the Underlined Return To Transaction Link to Return To The List Of Transactions. For each transaction for ABC Mowing, we will identify the Source Document, Type Of Transaction, Accounts Affected, and determine and explain the Debits and Credits needed to properly record and post to our T-Accounts. Entry 1 1. ABC mows a client's yard and receives a check from the customer for $50 for the service provided. Source Document:Customer's Check Type Of Transaction:Cash Sale Accounts Affected:Cash   Sales Debits and Credits: Increase (Left Side) Cash: Debit    Increase (Right Side) Mowing Revenue (Sales): Credit Explanation Using Our Debit/Credit Rules:The asset cash is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side of the account so we increase cash by entering the amount in the left side as a debit. Mowing Revenue (Equity) is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of a revenue account is the right (credit) side of the account so we increase mowing revenue (sales) by entering the amount in the right side as a credit. Asset Account Cash Increase Decrease Debit Credit Beg Bal. 5,500 (1) 50   Revenue (Equity) Account Mowing Revenues Decrease Increase Debit Credit Beg Bal. 1,000 (1) 50 Return To Transaction Listing Entry 2 2. ABC purchases $100 worth of office supplies and stores them in their storage room. The office supply store gives them an invoice that allows them to pay for them in 15 days (on account). Source Document:Supplier's Invoice Type Of Transaction:On Account Purchase Accounts Affected:Inventory-Office Supplies   Accounts Payable Debits and Credits: Increase (Left Side) Inventory-Office Supplies: Debit    Increase (Right Side) Accounts Payable: Credit Explanation Using Our Debit/Credit Rules:The asset inventory-office supplies is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of inventory-office supplies, which is an asset, is the left (debit) side of the account so we increase inventory-office supplies by entering the amount in the left side as a debit. The liability accounts payable is also increased. Again, we record an increase by entering the amount in the normal balance side of an account. The normal balance side of accounts payable, which is a liability, is the right (credit) side of the account so we increase accounts payable by entering the amount in the right side as a credit. Asset Account Inventory-Office Supplies Increase Decrease Debit Credit (2) 100   Liability Account Accounts Payable Decrease Increase Debit Credit Beg Bal. 2,000 (2) 100 Return To Transaction Listing Entry 3 3. ABC places an ad in the local newspaper receives the invoice from the supplier and writes a check for $25 to the newspaper. Source Document:Supplier's Invoice and Company Check Type Of Transaction:Cash Purchase Accounts Affected:Advertising Expense (Equity)   Cash Debits and Credits: Increase (Left Side) Advertising Expense (Decrease Equity): Debit    Decrease (Right Side) Cash: Credit Explanation Using Our Debit/Credit Rules:The expense advertising expense is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of advertising expense, which is an expense account, is the left (debit) side so we increase advertising expense by entering the amount in the left side as a debit. The asset cash is decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side so we decrease cash by entering the amount in the opposite side which is the right (credit) side of the account as a credit. Some additional clarification might be useful in order to clarify why an expense is recorded as an increase with a debit. The actual amount of the advertising expense has increased. The business now has spent more for advertising. More expenses are not what a business or an individual wants. Increased personal expenses reduce our personal equity and likewise increased business expenses reduce the owner's equity of a business. Since an increase in an expense reduces equity it is recorded as an increase using a debit. Asset Account Cash Increase Decrease Debit Credit Beg Bal. 5,500 (3) 25 (1) 50   Expense (Equity) Account Advertising Expense Increase Decrease Debit Credit Beg Bal. 200 (3) 25 Return To Transaction Listing Entry 4 4. ABC purchases five mowers for $10,000 and finances them with a note from the local bank. Source Document:Bank Note Type Of Transaction:Borrow Money Accounts Affected:Mowing Equipment   Note Payable-Bank Debits and Credits: Increase (Left Side) Mowing Equipment: Debit    Increase (Right Side) Note Payable-Bank: Credit Explanation Using Our Debit/Credit Rules:The asset mowing equipment is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of mowing equipment, which is an asset account, is the left (debit) side so we increase mowing equipment by entering the amount in the left side as a debit. The liability note payable-bank is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of note payable-bank, which is a liability account, is the right (credit) side , so we increase note payable-bank by entering the amount in the right side as a credit. Asset Account Mowing Equipment Increase Decrease Debit Credit Beg Bal. 2,500 (4) 10,000   Liability Account Note Payable-Bank Decrease Increase Debit Credit (4) 10,000 Return To Transaction Listing Entry 5 5. ABC mows another customer's yard and sends the customer a $75 bill (invoice) for the service they performed. They allow their customer ten (10) days to pay them for this service (on account). Source Document:Sales Invoice Type Of Transaction:On Account Sale Accounts Affected:Accounts Receivable   Mowing Revenue (Sales) Debits and Credits: Increase (Left Side) Accounts Receivable: Debit    Increase (Right Side) Mowing Revenue (Sales): Credit Explanation Using Our Debit/Credit Rules:The asset accounts receivable is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of accounts receivable, which is an asset, is the left (debit) side of the account so we increase accounts receivable by entering the amount in the left side as a debit. Mowing Revenue (Equity) is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of a revenue account is the right (credit) side of the account so we increase mowing revenue (sales) by entering the amount in the right side as a credit. Asset Account Accounts Receivable Increase Decrease Debit Credit Beg Bal. 1,600 (5) 75   Revenue (Equity) Account Mowing Revenues Decrease Increase Debit Credit Beg Bal. 1,000 (1) 50 (5) 75 Return To Transaction Listing Entry 6 6. The owner of ABC needs a little money to pay some personal bills and writes himself a check for $500. Source Document:Check Type Of Transaction:Draw Accounts Affected:Cash   Draw Debits and Credits: Increase (left Side)Owner's Draw (Decrease Equity): Debit    Decrease (Right Side) Cash: Credit Explanation Using Our Debit/Credit Rules:The draw account owner's draw is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of owner's draw, which is a draw account, is the left (debit) side so we increase owner's draw by entering the amount in the left side as a debit. The asset cash is decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side so we decrease cash by entering the amount in the opposite side which is the right (credit) side of the account as a credit. Asset Account Cash Increase Decrease Debit Credit Beg Bal. 5,500 (3) 25 (1) 50 (6) 500   Draw (Equity) Account Owner's Draw Increase Decrease Debit Credit Beg Bal. 600 (6) 500 Return To Transaction Listing Entry 7 7. ABC pays the office supply company $100 with a check for the office supplies that they charged (promised to pay). Source Document:Check Type Of Transaction:Pay Supplier Charge Purchases Accounts Affected:Cash   Accounts Payable Debits and Credits: Decrease (Left Side) Accounts Payable: Debit    Decrease (Right Side) Cash: Credit Explanation Using Our Debit/Credit Rules: The asset cash is decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side so we decrease cash by entering the amount in the opposite side which is the right (credit) side of the account as a credit. The liability account accounts payable is also decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of accounts payable, which is a liability, is the right (credit) side so we decrease accounts payable by entering the amount in the opposite side which is the left (debit) side of the account as a debit. Asset Account Cash Increase Decrease Debit Credit Beg Bal. 5,500 (3) 25 (1) 50 (6) 500 (7) 100   Liability Account Accounts Payable Decrease Increase Debit Credit (7) 100 Beg Bal. 2,000 (2) 100 Return To Transaction Listing Entry 8 8. ABC receives a check from the customer who they billed (invoiced) $75 for services and allowed 10 days to pay. Source Document:Customer Check Type Of Transaction:Receive Customer Charge Payments Accounts Affected:Cash   Accounts Receivable Debits and Credits: Increase (Left Side) Cash: Debit    Decrease (Right Side) Accounts Receivable: Credit Explanation Using Our Debit/Credit Rules:The asset cash is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side of the account so we increase cash by entering the amount in the left side as a debit. Another asset account, accounts receivable decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of accounts receivable, which is an asset, is the left (debit) side so we decrease accounts receivable by entering the amount in the opposite side which is the right (credit) side of the account as a credit. We actually "swapped" one asset accounts receivable for another asset cash. Asset Account Cash Increase Decrease Debit Credit Beg Bal. 5,500 (3) 25 (1) 50 (6) 500 (8) 75 (7) 100   Asset Account Accounts Receivable Increase Decrease Debit Credit Beg Bal. 1,600 (8) 75 (5) 75 Return To Transaction Listing Entry 9 9. ABC purchased some mulch for $60 and received an invoice from their supplier who allows them 15 days to pay. The mulch was used on a customer's yard. Source Document:Supplier's Invoice Type Of Transaction: Purchase on Account Accounts Affected:Mulch Expense   Accounts Payable Debits and Credits: Increase (Left Side) Mulch Expense (Decrease Equity): Debit    Increase (Right Side) Accounts Payable: Credit Explanation Using Our Debit/Credit Rules:The expense mulch expense is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of mulch expense, which is an expense account, is the left (debit) side so we increase mulch expense by entering the amount in the left side as a debit. The amount owed to a supplier increased. The liability accounts payable is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of accounts payable, which is a liability, is the right (credit) side of the account so we increase accounts payable by entering the amount in the right side as a credit. Liability Account Accounts Payable Decrease Increase Debit Credit (7) 100 Beg Bal. 2,000 (2) 100 (9) 60   Expense (Equity) Account Mulch Expense Increase Decrease Debit Credit Beg Bal. 100 (9) 60 Return To Transaction Listing Entry 10 10. ABC bills (prepares an invoice) the customer $80 for the mulch and mowing his yard and receives a check for $80 from the customer. Source Document:Sales Invoice and Customer Check Type Of Transaction:Cash Sale Accounts Affected:Cash   Mowing Revenue (Sales) Debits and Credits: Increase (Left Side) Cash: Debit    Increase (Right Side) Mowing Revenue (Equity): Credit Explanation Using Our Debit/Credit Rules: The asset cash is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side of the account so we increase cash by entering the amount in the left side as a debit. Mowing Revenue (Equity) is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of a revenue account is the right (credit) side of the account so we increase mowing revenue (sales) by entering the amount in the right side as a credit. Asset Account Cash Increase Decrease Debit Credit Beg Bal. 5,500 (3) 25 (1) 50 (6) 500 (8) 75 (7) 100 (10) 80   Revenue (Equity) Account Mowing Revenue Decrease Increase Debit Credit Beg Bal. 1,000 (1) 50 (5) 75 (10) 80 Return To Transaction Listing ABC's Calculated Ending Account Balances After Posting Me, being the nice guy that I am, calculated the ending account balances for you. Assets Liabilities Equity Cash $5,080 Dr Accounts Receivable $1,600 Dr Mowing Equipment $12,500 Dr Inventory-Office Supplies $100 Dr Accounts Payable $2,060 Cr Note Payable-Bank $10,000 Cr Owner's Capital $7,500 Cr Mowing Revenue $1,205 Cr Advertising Expense $225 Dr Mulch Expense $160 Dr Owner Draws $1,100 Dr Let's perform our checks on our ending balances after posting. The first check is to see if our Accounting Equation balances and the second to make sure that the debit balances equal the credit balances. Equation Check Calculations Total Assets = Cash + Accounts Receivable + Mowing Equipment +Office Supplies Total Assets = 5,080 + 1,600 + 12,500 + 100 Total Assets = 19,280 Total Liabilities = Accounts Payable + Notes Payable Total Liabilities = 2,060 + 10,000 Total Liabilities = 12,060 Total Equity = Owner's Capital + Revenues - Expenses - Draws Since we have more than one expense let's summarize them before we use them in our equation. Total Expenses = Mulch Expense + Advertising Total Expenses = 160 + 225 Total Expenses = 385 Total Equity = Owner's Capital + Revenues - Expenses - Draws Total Equity = 7,500 + 1205 - 385- 1100 Total Equity = 7,220 Substituting our totals into the Accounting Equation we find that our equation balances. Assets = Liabilities + Owner's Equity 19,280 12,060 7,220 Our second check is to see if our debit account balances equal our credit account balances. Let's Total Our Debit Balances Cash 5,080 Accounts Receivable 1,600 Mowing Equipment 12,500 Inventory-Office Supplies 100 Advertising Expense 225 Mulch Expense 160 Owner's Draw 1100    Total Debits 20,765 Now we'll total our Credit Balances Accounts Payable 2,060 Note Payable-Bank 10,000 Owner's Capital 7,500 Mowing Revenue 1,205    Total Credits 20,765 Looks like everything is still in balance after we posted our transactions. Assets = Liabilities + Owner's Equity and our Debit Balance Accounts = our Credit Balance Accounts. Oh no, more debit and credit testing ! Yeah, you're back under the grilling lights once again. At least it's not a padded cell. Look at the good side. At least by now you should be very familiar with our mowing guy's transactions. Debit/Credit Skills Test III Note:Skill Tests use JavaScript which is enabled on most computers. That wasn't too bad was it ? Get a grip on yourself. We still have three more lessons to complete. Let's tackle the next lesson that covers the General Ledger and Journals. <--BACK        NEXT--> Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7 Bean Counter