So, you want to learn
Bookkeeping!
by Bean Counter's Dave Marshall

Lesson 4
Recording Business Transactions


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7
Bean Counter

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. 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.

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