[PDF] Rules of Debits and Credits

1504_2acc_111_exam_review_1_notes_and_solution.pdf

The Accounting Equation:

Assets = Liabilities + Owners' Equity

Assets = Something that the business owns that provide a future benefit Liabilities = Things that are owed. Claims against the business

Owner's Equity = Net Assets of the Business.

Debit means to increase an account.FALSE

Any Account

Left-SideRight-Side

DebitCredit

= + Left-SideRight-SideLeft-SideRight-SideLeft-SideRight-Side

DebitCreditDebitCreditDebitCredit

IncreaseDecreaseDecreaseIncrease

Impact:

2 Increases:

Left-SideRight-SideOwner's Capital

DebitCreditRevenues

IncreaseDecrease

2 Decreases:

Owner's Drawings

Left-SideRight-SideExpenses

DebitCredit

IncreaseDecrease

Assets= +Liabilities + +Revenues

Left-SideRight-SideLeft-SideRight-Side

DebitCreditDebitCredit

DecreaseIncreaseDecreaseIncrease

-Owner's Drawings -Expenses

Normal Balance of an account??

Side of the account that you record increases. When preparing journal entries, the following 3 statements must be true:

1) You must have at least TWO Accounts.

2) You must have at least one Debit and at least one Credit

3) Total debits in dollars equal total credit in dollars

Owner's Capital

Owner's Drawings

Expenses

AssetsLiabilitiesOwners' Equity

Rules of Debits and Credits

During the month of September 2020, Madison Service Company had the following transactions:

Sept. 3 The owner, W. Madison, invested cash of $35,000 and repair equipment of $15,000 into the

business.

CashAssetIncreasingDebit35,000 50,000

Repair EquipmentAssetIncreasingDebit15,000

W. Madison, CapitalCapitalIncreasingCredit50,000 5 Purchased office supplies for cash, $3,900.

Office SuppliesAssetIncreasingDebit3,900

CashAssetDecreasingCredit3,900

8 Purchased a one-year insurance policy in advance, $7,200.

CashAssetDecreasingCredit7,200

Prepaid InsuranceAssetIncreasingDebit7,200 10 Purchased repair equipment on credit, $5,000. Repair EquipmentAssetIncreasingDebit5,000 Accounts PayableLiabilityIncreasingCredit5,000 12 Performed repair service and received cash from clients, $10,800.

CashAssetIncreasingDebit10,800

Repair Service RevenueRevenueIncreasingCredit10,800

15 The business made a partial payment for the repair equipment purchased on Sept. 10, $2,500.

Accounts PayableLiabilityDecreasingDebit2,500

CashAssetDecreasingCredit2,500

17 Billed clients for repair service performed on credit, $9,200. Accounts ReceivableAssetIncreasingDebit9,200 Repair Service RevenueRevenueIncreasingCredit9,200 19 Paid for advertisement, $4,600.

CashAssetDecreasingCredit4,600

Advertising ExpenseExpenseIncreasingDebit4,600 Problem #1 - Analysis of each Business Transaction 23 Paid utility bills for the month, $800.

CashAssetDecreasingCredit800

Utilities ExpenseExpenseIncreasingDebit800 25 Received cash from clients that were billed previously on September 17, $5,200.

CashAssetIncreasingDebit5,200

Accounts ReceivableAssetDecreasingCredit5,200 28 Paid the employee wages, $6,700.

CashAssetDecreasingCredit6,700

Wages ExpenseExpenseIncreasingDebit6,700

28 W. Madison withdrew cash for personal use, $2,800.

CashAssetDecreasingCredit2,800

W. Madison, DrawingsDrawingsIncreasingDebit2,800

Problem #1 - Requirement #2

General Journal

DateAccount Name/ExplanationP.RDebitCredit

Sept.3Cashx35,000

Repair Equipmentx15,000

W. Madison, Capitalx50,000

5Office Suppliesx3,900

Cashx3,900

8Prepaid Insurancex7,200

Cashx7,200

10Repair Equipmentx5,000

Accounts Payablex5,000

12Cashx10,800

Repair Service Revenuex10,800

15Accounts Payablex2,500

Cashx2,500

17Accounts Receivablex9,200

Repair Service Revenuex9,200

19Advertising Expensex4,600

Cashx4,600

23Utilities Expensex800

Cashx800

25Cashx5,200

Accounts Receivablex5,200

28Wages Expensex6,700

Cashx6,700

28W. Madison, Drawingsx2,800

Cashx2,800

2020
Problem #1 - Requirement #1 and #3-

8/31/2068,000 9/5/203,900 8/31/2012,500

9/3/2035,000 9/8/207,200

9/12/2010,800 9/15/202,500

9/25/205,200 9/19/204,600

119,000 9/23/20800

9/28/206,700

Bal.90,500 9/28/202,800

28,500

8/31/204,300 9/25/205,200 8/31/2084,400

9/17/209,200 9/3/2050,000

13,500 Bal.134,400

Bal.8,300

8/31/202,000 8/31/203,400

9/8/207,200 9/28/202,800

Bal.6,200

Bal.9,200

8/31/207,000 8/31/2053,800

9/12/2010,800

9/17/209,200

Bal.73,800

8/31/202,200 8/31/2018,200

9/5/203,900 9/28/206,700

Bal.24,900

Bal.6,100

8/31/2042,000 8/31/2015,000

9/3/2015,000 9/19/204,600

9/10/205,000 Bal.19,600

Bal.62,000

8/31/2012,000 8/31/2011,500

9/15/202,500 8/31/2016,300 8/31/205,400

9/10/205,000 9/23/20800

21,300 Bal.6,200

Bal.18,800

CashUnearned Service Revenue

Accounts ReceivableW. Madison, Capital

Prepaid InsuranceW. Madison, Drawings

Accumulated Depreciation, Repair EquipmentRent Expense

Accounts PayableUtilities Expense

Prepaid RentRepair Service Revenue

Office SuppliesWages Expense

Repair EquipmentAdvertising Expense

5

The Trial Balance

Purpose: The Trial Balance is prepared to check if total debits equal to total credits.

How are accounts listed on the Trial Balance?

AssetsLiquidity

LiabilitiesWhen they are due

Owner's Capital

Owner's Drawings

Revenues

Expenses

Problem #1 - Requirement #3

Account NamesDebitsCredits

Cash $90,500

Accounts Receivable8,300

Prepaid Insurance9,200

Prepaid Rent7,000

Office Supplies6,100

Repair Equipment62,000

Accumulated Depreciation, Repair Equipment$12,000

Accounts Payable18,800

Unearned Service Revenue12,500

W. Madison, Capital134,400

W. Madison, Drawings6,200

Repair Service Revenue73,800

Wages Expense24,900

Advertising Expense19,600

Rent Expense11,500

Utilities Expense6,200

Totals251,500$ 251,500$

Madison Service Company

Unadjusted Trial Balance

September 30, 2020

Problem #2 Notes

Financial Statements

Income Statement

Revenues

Less: Total Expenses

Net Income or Net Loss Statement of Owner's Equity - It captures the change(s) in the Owner's Capital Account

Beginning Capital

Add:

Investment made by the Owner

Net Income

Subtotal

Less:OR

Owner's Drawings

Net Loss

Ending Capital

Balance Sheet

Assets

Liabilities

Owners' Equity

Problem #1 - Preparing the Financial Statements

(For the Income Statement)12

Revenues:

Service Fees Revenue126,000$

Expenses:

Wages Expense19,200$

Utilities Expense5,000

Rent Expense31,000

Insurance Expense2,500

Advertising Expense4,000

Total Expenses(61,700)

Net Income64,300$

(For the Owners' Equity Statement)

Nicholas Jay, Capital, Beginning$150,000

Add:

Investment made by Owner32,000$

Net Income64,300 96,300 Subtotal246,300$ Less:

Nicholas Jay, Drawings(7,000)

Nicholas Jay, Capital, Ending239,300$

Nicholas Jay Company

Income Statement

For the Month Ended September 30, 2020

Nicholas Jay Company

Statement of Owners' Equity

For the Month Ended September 30, 2020

(For the Balance Sheet)

Assets:

Cash$190,000

Notes Receivable12,000

Accounts Receivable25,000

Store Supplies7,500

Prepaid Rent4,000

Store Equipment6,000

Building102,000

Total Assets346,500$

Liabilities and Owners' Equity

Liabilities:

Accounts Payable45,200$

Mortgage Payable62,000

Total Liabilities107,200$

Owners' Equity:

Nicholas Jay, Capital239,300

Total Liabilities and Owners' Equity346,500$

Nicholas Jay Company

Balance Sheet

September 30, 2020

Problem #3 Notes

Adjusting Entries:

Three categories of adjusting entries:

1) Prepaid Expenses and Unearned Revenues

Prepaid Asset/Expenses: Dr: _______ Expense Cr: Prepaid Asset Unearned Revenues: Dr: Unearned Revenues Cr: Revenue Account

2) Accrued Expenses and Accrued Revenues

Accrued Expenses: Dr: _______ Expense Cr: _______ Payable Accrued Revenues: Dr: _______ Receivable Cr: Revenue Account

3) Estimated Items

Dr: Depreciation Expenses, Name of Asset Amount Given Cr: Accumulated Depreciation, Name of Asset Bad Debts - We will cover this later in the semester.

Incurred/Expired/Used

Amount Earned

Incurred (taken place)

Amount Earned

Problem #3 - Preparing Adjusting Entries

General Journal

DateAccount Name/ExplanationP.RDebitCredit

Aug.31Office Supplies Expense900

Office Supplies900

($1,500 - $600 = $900)

31Depreciation Expense, Office Equipment1,000

Accumulated Depreciation, Office Equipment1,000

31Insurance Expense2,400

Prepaid Insurance2,400

31Unearned Rental Revenue9,000

Rental Revenue9,000

31Salaries Expense4,500

Salaries Payable4,500

31Accounts Receivable3,200

Rental Revenue3,200

31Rent Expense5,000

Prepaid Rent5,000

($9,200 - $4,200 = $5,000)

31Interest Receivable800

Interest Revenue800

31Interest Expense500

Interest Payable500

2020