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In this particular episode, you will learn

  • Debits and Credits Entries

Topics

Journal Entries
Example Accounting Entries
Memorization
Contra Accounts
Trial Balance Presentation
Summary

 

Journal Entries

Each transaction in accounting has a debit and credit side. Yet, the user of accounting software can be unaware of this because the entries are mostly automatic. Journal entries are the mechanism of how accounting transactions are manually entered using debits and credits. Every journal entry first displays debits and then credits for the purpose of consistent presentation. But as long as the total debits and credits are equal, the entry will still work regardless of order. Journal entries will have a date that the transaction takes place, description, and amounts.

Journal entries are often referred to as adjusting journal entries, or AJEs, as they adjust the accounting record. Adjusting journal entries are commonplace to make corrections. Entries are also made for non-cash transactions, such as depreciation and amortization.

Journal entries can incorporate more than one account, as long as the sum of debits equals the sum of credits. For example: Recording a cash asset sale of depreciated machinery for a gain would require increasing cash with a debit, removing the accumulated depreciation with a debit, removing the asset with a credit, and increasing gain on sale of asset with a credit. Entries can quickly become complicated, but make performing adjustments possible.

Memorize rule: journal entries first record debits, then credits

Memorize rule: journal entry debits = credits

 

Example Accounting Entries

Transfer $15,000 from savings to checking

Entries:

Increase cash in checking: debit cash in checking $15,000

Reduce cash in savings: credit cash in savings $15,000

Receive $1,000,000 from issuing common stock

Entries:

Increase cash: debit cash $1,000,000

Increase common stock: credit common stock $1,000,000

Make $300 credit sale

Entries:

Increase accounts receivable (AR): debit AR $300

Increase revenue: credit revenue $300

Collect cash for $300 credit sale

Entries:

Increase cash: debit cash $300

Decrease accounts receivable (AR): credit AR $300

Receive $250 internet bill for May, the last day of May, but not due until June

Entries:

Increase internet expense: debit internet expense $250

Increase accounts payable (AP): credit AP $250

Pay $250 internet bill for May in cash at the end of June

Entries:

Decrease accounts payable (AP): debit AP $250

Decrease cash: credit cash $250 

Record $7,000 of depreciation expense

Entries:

Increase depreciation expense: debit depreciation $7,000

Increase accumulated depreciation: credit accumulated depreciation $7,000
Receive $1,000 of cash revenue and pay $200 cash for meals and entertainment

(assume no beginning balances in the accounts)
Entries:
Increase cash: debit cash $1,000
Increase revenue: credit revenue $1,000
Increase expense: debit meals and entertainment $200
Decrease cash: credit cash $200
Result:

Ending cash: $800 debit

Ending revenue: $1,000 credit

Ending expense: $200 debit

Ending debits: $800

Ending credits: $800

 

Memorization

Typical debits & credits explanation diagrams start with assets. Assets increase with a debit. Expenses also increase with a debit. Therefore, assets and expenses both increase with a debit and decrease with a credit. Liability, equity, and revenue decrease with a debit and increase with a credit.

Debits & Credits Mnemonic (memory aid)

You may use this Debits & Credits Mnemonic to memorize how to increase and decrease accounts using debits and credits.

Debit cash up, credit down

Other side now, flip around

I got revenue credits, expenses as debits

Debit left, credit right - balance sheet so tight

Debits & Credits Mnemonic Explained

Debit cash up, credit down

Assets increase with a debit and decrease with a credit

Other side now, flip around

The other side of the balance sheet is liability and equity, which increase with a credit and decrease with a debit, the opposite or “flip” of assets

I got revenue credits, expenses as debits

Revenue increases with credits and decreases with debits

Expense increases with debits and decreases with credits

Debit left, credit right - balance sheet so tight

Debits are on the left side of the T-account and credits are on the right side of the T-account

Total debits always equal total credits on the balance sheet

 

Contra Accounts

Contra accounts are exceptions to the rule and will increase and decrease in the opposite manor as regular accounts. Asset contra accounts include: allowance for doubtful accounts and accumulated depreciation. Asset contra accounts increase with a credit and decrease with a debit.

There are also infrequently used contra equity and contra liability accounts which increase and decrease in the opposite manor as regular equity and liability accounts. Treasury stock is a contra equity account that increases with a debit and decreases with a credit. Bond discount is a contra liability account that increases with a debit and decreases with a credit. These are generally advanced accounting topics and are only relevant for large publically traded companies.

Contra accounts serve to indirectly reduce regular accounts. The accumulated depreciation contra account increases over time as depreciation expense is recorded. Let’s say a business purchases a truck for $50,000 cash. Truck asset increases $50,000 with a debit and cash decreases with a $50,000 credit. In order to show the decrease in value over time, depreciation expense is recorded. Take for example, depreciation expense recorded at $10,000 a year. Instead of directly reducing the truck asset value, depreciation expense will be increased with a debit and accumulated depreciation increased with a credit. The asset is presented as a positive debit and the accumulated depreciation as a credit that appears as negative. After recording the depreciation expense, the truck asset account is $50,000 and the depreciation contra asset account is $(10,000). When combined, the net asset value of the truck will be $40,000 (asset - accumulated depreciation). The original $50,000 is therefore maintained in the accounting record until the business no longer has the truck.

 

Trial Balance Presentation

The equation: Asset debits = Liability credits + Equity credits forms the balance sheet. When the balance sheet is prepared for financial statement purposes, regular accounts will be positive. The same account totals may also be presented on an accounting trial balance, in the form of debits as positive numbers and credits as negative numbers. Under this accounting presentation the sum of all debits and credits will equal $0.

In a trial balance, revenue credits will appear as negative numbers in brackets, such as $(1,000,000) of revenue and expenses will appear as positive numbers, such as $200,000 of expense. To figure a profit or loss, the revenue credits of $(1,000,000) are added to the $200,000 of expense debits, resulting in $(800,000). Under the system of debits and credits, the resulting $(800,000) represents net income and will be recorded to retained earnings. The $800,000 will be debited, resulting in closing the income statement, and the other side of the transaction will be a $800,000 credit to retained earnings. The income statement shows net income positively, the opposite of the trial balance presentation.

 

Summary

Understanding debits and credits is fundamental for accounting professionals. Other users of financial information, such as business owners and lenders may never need to apply the concept. To learn more and practice, find more resources at AccountingPlay.com. To quiz yourself and learn differently, download the Accounting Game - Debits and Credits, the free app for iPhone and iPad designed to teach in a game format.