Super Simple Rules:
1. Assets (things you own) → Debit increases, Credit decreases
(Ex: You buy a laptop, your assets go up, so you Debit
"Laptop")
2. Liabilities (what you owe) → Debit decreases, Credit increases
(Ex: You take a loan, your debt goes up, so you Credit "Loan
Payable")
3. Expenses (money spent) → Debit increases, Credit decreases
(Ex: You pay rent, so you Debit "Rent Expense")
4. Revenue (money earned) → Debit decreases, Credit increases
(Ex: You sell a product, so you Credit "Sales Revenue")
5. Equity (owner’s money in the business) → Debit decreases,
Credit increases
(Ex: Owner invests money, so you Credit "Owner’s Equity")
Assets= normal debit
If asset increases, you debit
Whenever drawing, expenses, or assets go up you debit it
Debits on left, credits on right
DEA
NORMAL DEBIT (goes up)
Drawings, expenses, asset
DEBIT IT
:
LER
Liabilities, equity, revenue
NORMAL CREDIT (goes up)
When these go up, you credit it
If either of these go down, do the opposite.
1. Assets (A)
What the business owns (cash, inventory, equipment, buildings,
accounts receivable).
Increase with Debit, decrease with Credit.
Example: Buying office supplies increases assets (Debit "Office
Supplies").
2. Liabilities (L)
What the business owes (loans, accounts payable, mortgage,
salaries payable).
Increase with Credit, decrease with Debit.
Example: Taking a loan increases liabilities (Credit "Notes Payable").
3. Equity (E)
The owner’s investment in the business.
Increase with Credit, decrease with Debit.
Example: Owner invests money (Credit "Owner’s Capital").
Revenue increases
:
4. Drawings (D)
Money paid to owners/shareholders from profits.
Increase with Debit, decrease with Credit.
Example: Paying dividends (Debit "Dividends").
5. Expenses (E)
Costs of running the business (rent, salaries, utilities, advertising).
Increase with Debit, decrease with Credit.
Example: Paying rent (Debit "Rent Expense").
6. Revenue (R)
Money earned from selling goods/services.
Increase with Credit, decrease with Debit.
Example: Selling a product (Credit "Sales Revenue").
Investments make your owner's capital go up
Example-
You have to pay rent expense of $500
(two accounts always being affected with transactions)
Expenses go up in debit
Assets go down in credit
:
Debits will always equal credits
The purpose of accounting is to identify record and communicate
the economic events of organization to interested users
Internal users- people in company
External users- IRS, investors, SEC, customers
Generally accounting accepted principals= set of standards
accepted and universally practiced
Is the company operating within prescribed guidelines? Regulatory
Agency
Is the company complying with tax laws? Internal Revenue Service
Is the company able to pay its debts? creditor
Is the company a good investment? Investor
A 1. Accounts receivable
L 2. Accounts payable
OE 3. Owner’s Capital
A 4. Supplies
OE 5. Utilities expense
:
A 6. Cash
L 7. Notes payable
A 8. Equipment
Cost principle- stays on sheet as ACV
Monetary unit assumption- assumption that you are only recording
things expressed in monetary
(Proprietorship (Sole Proprietorship) = Business owned by one
person.
No legal separation between owner and business.
Owner keeps all profits but also takes all losses.)
A partnership is a business owned by two or more people who share
profits, losses, and responsibilities. (unlimited liability)
A corporation is a separate legal entity from its owners, meaning the
business, not the owners, is responsible for debts and liabilities.
(limited liability)
Income Statement (Profit & Loss Statement)
Shows revenue, expenses, and profit/loss over a period.
Formula: Revenue - Expenses = Net Income
Example: If a business earns $50,000 in sales and spends $30,000
on expenses, net income = $20,000.
Owner’s Equity Statement
:
The Owner’s Equity Statement shows changes in
the owner's equity over a period. Formula:
Beginning Equity + Owner’s Investments + Net Income -
Withdrawals = Ending Equity
Key Parts:
1. Beginning Equity – The amount of equity at the start of the
period.
2. + Owner’s Investments – Any money or assets the owner adds.
3. + Net Income (or - Net Loss) – Profit increases equity, losses
decrease it.
4. - Owner’s Withdrawals (Drawings) – Money taken out by the
owner.
5. = Ending Equity – The final amount of equity after all changes.
Example:
A business starts with $10,000 in equity.
The owner invests $5,000 more.
The business earns $8,000 in profit.
The owner withdraws $3,000.
Balance Sheet
Shows what the company owns (assets), owes (liabilities), and
equity at a specific time.
Formula: Assets = Liabilities + Equity
Example: If a company has $100,000 in cash and owes $40,000 in
:
loans, equity = $60,000.
Cash Flow Statement
Shows money coming in and going out (cash movement).
Includes:
Operating Activities (daily business cash flow).
Investing Activities (buying/selling assets).
Financing Activities (loans, stock sales).
Statement of Retained Earnings
Shows profits kept in the business instead of paid to owners.
Formula: Beginning Retained Earnings + Net Income - Dividends =
Ending Retained Earnings
1. Cash BS
2. Service Revenue IS
3. Notes Payable BS
4. Interest Expense IS
5. Accounts Receivable BS
Steps in recording process- analyze, journal, post to ledger, trial
balance, financial statements, closing entries
Accrual basis accounting records revenues and expenses when they
happen, not when cash is received or paid. You record no matter
what. If you have an expense you write it regardless of when you
:
gave out the cash.
On account definition- person has not paid cash yet
Net income= revenues minus expenses
Q- a small company may be able to justify using cash basis of
accounting if they have A- few receivables and payables
Adjusting entries are required bc some costs expire with passage of
time and have not been journalized
Answer- adjusting entries are necessary to bring general ledger
accounts in line w budget
Answer- adjusting entry affects a balance sheet account and an
income statement
Answer- preparation of adjusting entries involve process requiring
skills of professional
Answer- if a resource has been consumed but bill not received then
adjusting entry should be made recognizing expense
Answer- unearned revenue is classified as a liability
If a business received cash in advance of performed service
(unearned revenue increased) > debit unearned revenue and credit
servic
:
:
yearly depreciation expense= cost of equipment minus salvage
value divided by useful life
Adjustments for accruals are needed to record a revenue that has
been earned or an expense that has been incurred but not recorded
TRUE
Expenses result from using up assets or consuming services
generating revenues TRUE
Which of the follow is an ex of accrued expense? Salary owed but
not paid
:
:
: