Lesson: 9

Topic: Understanding Debit and Credit Theory / Recording Asset and Liability Changes in T-Accounts

Objectives:

During this class students will continue their examination of debit/credit theory. Students will learn how to record transactions within asset and liability accounts.

Definitions

Debit: The left side of an account

Credit: The right side of an account

Account: A tool used to record inflows to, and outflows from, a similar group of items.

Element: One of the three categories within the accounting equation, namely assets, liabilities, and owner's equity. These elements are used to organize all of a business' accounts.

Debit-Credit Principle:

If an entry to an account is causing an increase to an element, then record it within the same side as the element which it is increasing. If an entry to an account is causing a decrease to an element, then record it within the opposite side of the element which it is decreasing.

Thus, for some accounts we will record entries on the debit side when we are recording inflows, yet for other accounts we will record entries on the debit side when we are recording outflows. Below is a summary of when to debit and credit the various accounts of a business. It is best not to memorize this information, but rather to understand the principle which guides us when debiting and crediting.

ASSETS	=	LIABILITIES	+	OWNER'S EQUITY
Cash		Bank Loan		Capital
Accounts Receivable		Accounts Payable		Drawings
Office Supplies		Mortgage Payable		Revenue
Any other Asset		Any other Liability		Expenses

Test the Theory:

Refer to the diagram of the accounting equation while you consider the account entries described below. In each case, determine whether these entries would be made to the debit side of the account or the credit side of the account. Check the solution for each entry when you are done.

Assets

=

Liabilities

+

Owner's Equity

Entry	Your Answer	Solution
An increase to the cash account...	_____________	Solution
A decrease to an account payable...	_____________	Solution
An increase to an expense account...	_____________	Solution
An increase to a bank loan...	_____________	Solution
An increase to an account payable...	_____________	Solution
A decrease to the cash account...	_____________	Solution
A decrease to a bank loan...	_____________	Solution
An increase to the capital account...	_____________	Solution
An increase to the drawings account...	_____________	Solution

Method of Instruction and Evaluation:

After a Socratic lecture on the above topics, students will complete the following exercises:

• Exercise #2 on page 91 within your text; and
• Exercise #4 on page 92 within your text.

Expectations Addressed:

The "Fundamental Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• Introduction to Accounting as a Discipline:

  • explain the purpose of accounting;

  • explain the difference between accounting and bookkeeping;

  • identify the users and uses of accounting;

  • identify the Generally Accepted Accounting Principles (GAAP) and explain their importance.

• Business Structures:

  • describe the characteristics of different forms of business organization, including sole proprietorship, partnership, and corporation;

  • describe the advantages and disadvantages of different forms of business organization, including sole proprietorship, partnership, and corporation;

  • explain the differences among the equity sections of different forms of business organization, including sole proprietorship, partnership, and corporation (e.g., capital account in a sole proprietorship versus common stock in shareholders’ equity in a corporation).

• The Accounting Cycle for a Service Business:

  • assess the effects that transactions have on the accounts and financial statements of a service business;

  • record transactions using the journals and ledgers of a service business;

  • prepare a trial balance and the financial statements for a service business;

  • record adjusting and closing entries for a service business (e.g., prepaid expenses, amortization, accruals);

  • describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a service business;

  • apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business.

References:

• text, chapter #3; pages 83-90
• Handout: When to Debit, and When to Credit?