Tutorial

Table of Contents
1 Learning Objectives

7

Review Question 1
2 Overview

8

Debits and Credits: Revenue and Expense Accounts
3 Double-Entry Bookkeeping

9

Debits and Credits: Example 2
4 General Ledger

10

Review Question 2
5 Debits and Credits: Assets, Liabilities and Owners' Equity

11

Summary
6 Debits and Credits: Example 1

12

Key Terms


Learning Objectives
After completing this tutorial you should be able to:

To introduce double-entry bookkeeping.

To analyze which accounts are debited and credited by transactions.

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Overview

Previous tutorials described the accounts used for recording transactions. These tutorials also discussed the analysis of transactions to determine their effect on accounts. After analyzing the effect of transactions on asset, liability and owners' equity accounts, the information about these transactions is recorded in a set of accounting books. This tutorial describes double-entry bookkeeping, a systematic method for recording transactions in the accounting system.

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Double-entry Bookkeeping
The term double-entry comes from the requirement that each transaction be recorded in at least two accounts. Recall the accounting equation:

Assets = Liabilities + Owners' Equity

This equation must remain in balance at all times. Therefore, if one element in the equation changes, some other elements must also change to maintain the balance. Thus at least two accounts will be affected by every transaction.

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General ledger

The general ledger is used to record the impact of transactions on accounts. Two columns are used to record the increases and decreases to an account respectively. These columns form a "T" as shown in the above figure. Thus the general ledger is also referred to as T-accounts. One T-account is used for each account in the accounting books. The column on the left side of the T-account is called the debit side. The column on the right side is called the credit side.

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Debits and Credits:
Assets, Liabilities and Owners' Equity

The side used for recording increases is based on the accounting equation shown below:

Assets= Liabilities + Owners' Equity

Assets are on the left side of the above equation. As shown below increases in assets are recorded in the column on the left (the debit) side.

Debit

 

Credit

|

Liabilities and owners' equity appear on the right side of the accounting equation. Hence, increases in liabilities and owners' equity are recorded on the right (the credit) side. For example, Notes Payable is credited for increases and debited for decreases.

Debit

 

Credit

|


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Debits and Credits: Example 1

For each of the following independent transactions, identify the account that would be debited and the account that would be credited.

1. Davis Company borrowed $15,000 from a bank by signing a note payable.

Cash

Debit

 

Credit

 

|

Notes Payable

Debit

 

Credit

 

|

2. Purchased supplies for $178. Paid cash.

Supplies

Debit

 

Credit

|

Cash

Debit

 

Credit

|

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 Review Question 1
Fill in the blanks. Use a term from the list given below.

Terms:

credit

credited

debit

debited

Increases in assets are recorded in the    column of the T-account.

A decrease in liabilities is recorded in the   column of the T-account.

When a business sells goods/services, the revenue account is   .

When a business pays rent for the period, an expense account is  .

Increases in owner's equity are recorded in the     column of the T-account.

An increase in Accounts Receivable is recorded in the  column of a T-account.


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 Debits and Credits: Revenue and Expense Accounts


Owners' equity is increased when the business earns revenue. Owners' equity is credited for increases. Thus revenues are recorded by crediting the appropriate revenue accounts.

Debit

 

Credit

|


Owners' equity is decreased when the business incurs an expense. Owners' equity is debited for decreases. Thus expenses are recorded by debiting the appropriate expense accounts.

Debit

 

Credit

|  
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Debits and Credits: Example 2

For each of the following independent transactions, identify the account that would be debited and the account that would be credited.

1. Grove Consulting provided services for $5,000 to customers. The customers paid cash.

Cash

Debit

 

Credit

|

Sales Revenue

Debit

 

Credit

|

2. Supplies costing $75 were used during the period.

Supplies Expense

Debit

 

Credit

|

 

Supplies

Debit

 

Credit

|

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Review Question 2
Fill in the blanks. Use a term from the list given below.

Terms:

cash

credited

debited

general ledger

notes payable

T-accounts

The  is used to record the effect of transactions on accounts.

The general ledger is also called .

An expense account is   when a business pays rent for the period.

 is debited when a business repays money to a creditor.

  is debited when a business borrows money from a creditor.

A revenue account is    when a business sells goods or services.

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Summary
The traditional approach used to process transactions is known as double-entry bookkeeping since each transaction must be recorded in at least two accounts.

The general ledger is used to systematically record increases and decreases in account balances resulting from different transactions.

Two columns are used to record the increases and decreases to an account respectively. The column on the left side of the account is called the debit side and the right side is called the credit side. The type of an account determines which side is to be used for recording increases or decreases in a particular account.

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Key Terms

Credit General Ledger
Debit T-Account
Double-entry Book Keeping  

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