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The sbest
Let firstwayreviewto learn theaccounting
rules of Preparing
debits
is to and
Journal
work credits
withEntries
examples.
by workingLet's
withget thestarted.
accounting
equation (Assets = Liabilities + Stockholders?Equity). Assets are increased with
Liabilities
Stockholders?Equity
Account
debits and Increase
decreased
are increased
Decrease
consists
withwith
Ccredits.
ommon
ofcredits
several
Stock and
Caccounts:
r Ddecreased
r Retainedwith
Earnings
debits.Cr Dr Revenues Cr Dr Expenses
Common
Dividends Stock, Dr Retained
Cr  Earnings, and Revenues all increase Stockholders?Equity a
nd are increased with credits. Expenses and Dividends are overall decreases to
Stockholders?Equity
We
Step
Transaction
will
21 -work Analyze
Record
1with- Athethe
a transaction
new
and
two
transaction.
corporation
are increased
step process.
inissues
thewith
general
1,000
debits.
journal.of common stock and receiv
shares
esCommon
Accounts
Assets
Stockholders'
Step
Cash
Transaction
$75,000
21 --
75,000?Cash
Affected:
Stock
The
cash.
2is--corporation
Equity
journal
75,000
increased.
The corporation
-entry
Common
isisraising
Stockacquires
iscapital
increased.
equipment.
by issuingTheshares
purchase
of itsprice
stock.
is $100
,000.1 --
Step TheThe corporation
asset, equipment,
pays $25,000 is acquired.
cash and signsThe note
a note
payable
for therepresents
balance.debt a
nd is a liability which is being increased. Some students want to use Accounts
Payable. Accounts Payable is a liability but it reflects informal credit arrang
ements that are generally due in 30 - 45 days. Notes Payable, however, are form
al legal promissory notes that have specific due dates, generally bear interest,
and have a higher legal standing in a bankruptcy proceeding. Also, some studen
ts do not want to record an asset unless it has been fully paid for. Assets are
recorded even if there is related debt. The company still owns the asset. Tho
ugh the corporation does not have clear title to the asset until the related deb
t is paid,
Accounts
Assets ?Equipment
Affected:
it is still is increased
the owner Liabilities
of the asset.
- Notes Payable is increased Assets - Ca
sh Cash
Step
Equipment
Thisisis
Notes
2decreased
--aPayable
The journal
100,000
compound 75,000
25,000
entryentry
because
is it has more than one credit. A transaction can
affect more than one debit and/or more than one credit account. The important
point is that the total of all debits equals the total of all credits for each j
ournal1 --
Transaction
Step entry.Services
3 -- Serviceshave been areperformed,
performed thusand clients
revenueareis recorded
billed for(to$40,000.
comply with
the revenue recognition principle ?record revenue when it is earned). Clients
have been billed and will pay later. This reflects an increase to the asset, Ac
counts Receivable. Accounts Receivable represents open, informal credit granted
to a company's clients or customers. The amounts are generally due in 30 - 45
days.
Assets
Stockholders?Equity
Accounts
Transaction
StepService
12 ?Employees
- Receivable
-- Affected:
Accounts
The
Revenue
4 -- journal
Salaries
Receivable
have
- 40,000
Service
entry
worked
ofis$10,000
isand
40,000
Revenue
increased
earned
are
is their
increased
paid. salaries. This represents an exp
ense of the accounting period. The matching principle requires expenses to be r
ecorded
Accounts
Stockholders?Equity
Assets
Step
Salaries
Transaction
Cash 2 -- -inExpense
Affected:
Cash
The
the
5 ?Cash,
isperiod
journal
decreased
10,000
-inentry
they
Expense
10,000
the are
isisincurred
amount increased
of $20,000,
to generate
is collected
revenue.from clients who wer
e previously billed. (Transaction 3 - Services were performed and clients were
billed1 ?Clients
Step for $40,000. are paying on their accounts. Some students want to increase re
venue with a credit. This is not correct because revenue is recorded when the s
ervices are performed (or when goods are delivered). The revenue was properly r
ecorded
Accounts
Asset
Assets
Cash
Transaction
Step AR120,000
2--- -Cash
inAccounts
Affected:
The
AnTransaction
20,000
6asset,
is--
journal
increased
$1,000
Receivable
Supplies,
entry
3.of supplies
This
isisisdecreased
transaction
acquired.
are purchased
is a swap
There on no
is account.
ofexpense
one asset at this
for another.
time. T
he expense will be recorded when these supplies are used up. For now, an asset
exists because the supplies represent something of future value (something that
will be used at a future date). No cash is being paid. The supplies are acquir
edAPon2account
Accounts
Assets
Liabilities
Step
Supplies
Transaction - Supplies
-- Affected:
The
1,000
7- --(an
Accounts
journal
1,000
Ais
increase
contract
increased
entry
Payable
toisasigned
isliability).
increased
with a client. The client immediately pay
s $15,000
Step 1 ?Nofor revenueserviceshas been
to beearned
performedbecause
at athe
later
company
date.has simply worked out an
agreement with the client. The asset, Cash, has been received and must be recor
ded. The credit is to a liability - Unearned Revenue. The company now owes the
service or a refund to the client. Revenue will be recorded when the services h
aveUnearned
Accounts
Assets
Liabilities
Cash
Transaction
Step been2 --
115,000
- Cash
performed.
Affected:
The
This
Revenue
8- --
istransaction
Unearned
journal
increased
$1,000
15,000
entry
Revenue
is does
paid
is isnot
forincreased
the supplies
affect the asset
purchased
accountin--Transaction
supplies. 6.The a
sset, Supplies, was properly increased in Transaction 6. The company now is pay
ingCash
Liabilities
Assets
Accounts
Transaction
Step its 12 --
-liability.
Affected:
Cash
Payable
The9- asset,
Accounts
is
journal
-- decreased
Services
1,000
Cash,
entry
1,000
Payable
are
isisreceived.
performed
is decreased and
Services
cash ofhave$2,000
beenisperformed,
received.thus reve
nue must be recorded. The revenue recognition principle states that revenues ar
e Service
Accounts
Assets
Stockholders?Equity
Cash
Transaction
Step
recorded12 --
- Cash
2,000Affected:
The
Revenue
Dividends
when10journal
is--they
increased
Dividends
-2,000
represent
are
Service
entry
earned.
isaRevenue
of $2,500
distribution
is increased
are paidtotostockholders.
the stockholders.Dividends do not
affect net income. The account is a negative component of stockholders' equity.
Accounts
Assets
Stockholders?Equity
Step
Dividends
These
Cash2ten -isCash
-- Affected:
paid2,500
The
examples istodecreased
journalthe
2,500
have
?Dividends
stockholders.
entry
givenisyou areanincreased
opportunity to work with the rules of debit
s and
In addition,credits.you(Practice) are now comfortable with the two step process of analyzing tran
sactions
This provides
and then a soundrecording
foundation
them that
in thewillgeneral
help you
journal.
with more
(Confidence)
complicated transa
ctions. (Building Blocks)

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