Hello in this presentation we will be recording a business transactions related to accounts payable or the purchases cycle recording these transactions with debits and credits. At the end of this we will be able to list transactions involving accounts payable, record transactions involving accounts payable using debits and credits and explain the effect of transactions on assets, liabilities, equity, revenue, expenses and net income. We’re going to be recording these transactions up here in the left hand side in accordance with our thought process. We will then be posting these not to the general ledger but to a worksheet format so that we can see a quick calculation as to what is the impact or effect on the individual accounts as well as the effect on the account groups as a whole. Remember that all the groups for the accounts will always be listed in order when you’re looking at a trial balance. Which is why I recommend looking at a trial balance.
Whenever working through problems such as these. For example, we have the assets in green. Here we have the liabilities. In orange, we have the equity in light blue, and then the dark blue revenue and expense accounts those been the income statement accounts. These will be our beginning balances. Note that over here, when we record the journal entries, we are going to have debits and credits in separate columns and represent the credits with the brackets. Over here on the trial balance. However, we’re going to combine the debits and credits into one column and represent the credits with brackets. And note that the debits are the same as credits by a subtraction problem of debits minus credits being zero. The reason for that is that it’s really going to simplify the process. It’s really useful to know when working with Excel it will help simplify the process and help to simplify formulas and therefore It’s worth it’s worth using. And so that’s why we will use it. So we can see that we have cash here at 50,000.
We’ve got the debts, the debit, and then we got the owner capital at 40,000. And we’re starting out with revenue at 10,000. We are then going to record this first transaction saying purchased supplies on account for 450. First question is cash affected. And we’re going to say no, because the purchase happened on account, therefore cash is not happening. We know that on account is going to mean typically either accounts receivable or accounts payable. In the context of purchasing, we mean accounts payable. So we might think that we should start with accounts payable but I’m going to I’m going to say that we should start with what we receive. First reason being is because it can be more easier to know whether to increase or decrease what we have received because we received it therefore it will be increasing. What the debit and credit will be related to it. So although we know we’re probably know at this point, and we do know at this point, we’re going to be dealing with accounts payable. Let’s think about what we got. In this case, we got supplies, supplies, if we look at our trial balance is right here, it’s in the asset section, therefore, it is an asset.
And we know that we got more of it. So it needs to go up. How do we make something go up, we do the same thing to it as its normal balance, like all the assets, here, the normal balance will be a debit, and therefore to increase it the same thing would be another debit. So we can increase the supplies. And if we do that, then we know that the other account must be credited. And we know that other account is not decreased to cash. We didn’t pay cash, if we had the credit would go to cash and decrease the asset. But instead we bought it on account here supplies going up, by the way, supplies increasing from zero by 450 to 450. And then the other accounts been Accounts Payable. So we’re increasing liability, we’re increasing the bad thing. Now we already knew we were going to credit the liability that credit accounts payable, because we debited supplies. That’s why we worked it in this format. But we want to just analyze that and double check that for ourselves. We know that the accounts payable is a credit balance account, it being a liability account, The bad thing is going up in that we owe more money, we bought something on account kind of like a credit card bill in that we owe money for the purchase that we have.
And that credit card tab then increases with a credit liabilities having a credit balance, the same thing to it will increase it that then being another credit, the liabilities going up from zero by 450 in the credit direction at to a credit balance of 450 effect on the accounting equation would be assets are increasing because supplies are going up liabilities also increasing. As the accounts payable is going up and equity no impact nothing in either the capital account is happening here or the income statement accounts of revenue and expenses. Therefore, the net income as well is staying the same in that we had revenue before have 10,000 minus expenses of zero given us a net income calculated as revenue minus expenses of 10,000. Remember that this 10,000 here is a net income, revenue of credits being the debits of expenses. This is not a loss or a negative number represents credits for us when we are considering the trial balance. And of course, no activity happened. And we are remaining at the 10,000 net income, revenue minus expenses.
Next transaction, paid cash for supplies purchased on account 450 first question is cash affected? We’re going to say yes caches affected hear key term paid. And that of course means cash is going down. So we’re going to decrease cash, cash has a debit balance, we’re going to make it go down by doing the opposite thing to it as its normal balance, which in this case would be a credit. We’re going to put the credits on the bottom because credits typically go on the bottom. Let’s clean up a couple terms that may be confusing when considering a book problem such as this note that we have paid here and we also have another key term on account that may confuse us when we are first working with these types of transactions. Because in the prior transaction, we said on account means that accounts payable or accounts receivable will be impacted in this case accounts payable, and therefore we might think, well then cash it shouldn’t be affected because we’re dealing with an on account transaction something dealing with accounts payable notes, however, that when we are purchasing something that would be correct.
If we purchase something on account, we didn’t pay cash, but paid on account paid with something like a credit card paid on a tab. However, the second transaction will be us paying off the tab, and therefore we’re going to have to pay off the tab with cash. So that means that we’re going to have both in on account and paid in the wording. In real life, of course, we would have an idea of what we are doing, we’d be writing a check to possibly the credit card company or some vendor, and it would be very clear that we are decreasing cash with a check and writing that to a vendor to reduce the amount that we owe to those individuals, the IOU being the accounts payable account. In a book problem. It’s going to be very generic, and we’re just going to have to know what those terminology terms mean. Obviously paid means we paid with cash.
Note that if it said paid for supplies, and it eliminated the cash altogether, paid means paid with cash in real life, clearly we’d be paying with a check. But that means cash for a book problem. On account might it might also say on credit, many books will not include the term on credits because they’re trying to separate the concept of credit from what is meant when we are debiting. And crediting in terms of journal entries from other contexts, such as a tab, increasing and decreasing which could imply slightly different things. But note if you see on credit, you’re going to have to distinguish that from something like running a tab up or paying a tab off as opposed to debiting and crediting in terms of a normal journal entry type process. Also, note when we thought about cash First, we’re going to credit cash because we’re decreasing cash and therefore we are putting it on the bottom. We have to put the credits on the bottom remember, we are not going to start by by forcing ourselves to do the debit first just because the debit goes On top and then format the journal entry from left to right, we are going to think about the journal entry in a format that makes the most sense in a format that is easiest for us to construct. And it is easiest for us to construct cash first.
So we will put that on the bottom. Remember that it’s just really a convention to put the debits on top and the credits on the bottom. However, it’s a convention we want to follow as much as possible. Book problems will of course mark you off if you do not in. In real life, there are situations when we would deviate from that convention. For example, if we’re if we’re auditing, and we’re performing longer, more complicated journal entries, we may and we do want to make the journal entry not in a format that applies to just a convention like this or to some kind of computer programming type convention but in a format that someone human can go back and read and try to interpret as best they can. So whatever the best way to to format in a journal entry environment context. That’s what we would use. But we’re going to follow this convention. And we’re going to put the credits on the bottom. But still think about cash first, then we just need to know that what we’re going to debit here and of course, we are going to debit by the way cash is going down from the 50,000 minus the 450, debit master credit 249 550. The debit been, as we stated, the other account of accounts payable, we know that we are going to debit accounts payable, because we credited cash.
That’s why we’re going to credit cash first, however, we do want to double check ourselves. Remember that the accounts payable represents money that is owed from the company to a vendor, and their liabilities have credit balances, we paid off the vendor and therefore this liability needs to go down. So we’re going to do the opposite thing to it as its normal balance, which in this case is a debit. So that’ll kind of double check ourselves. Here’s the credit. There’s the debit, it’s going to be Bring the balance back down to zero. Remember that in in many book problems, they’re not going to give us this journal entry in sequence after the prior journal entry. This one obviously follows the prior journal entry, meaning we bought supplies on account. And now we’re paying off on account. That will not be the case, typically, in a book problem, they’re just going to give you this journal entry. And they’re going to say, hey, you’re gonna have to know that if you paid supplies on account, that implies that in the past, there must have been at some point in time a purchase of supplies on account, and therefore there must be something owed in accounts payable.
They may not even give you the trial balance or tell you that there’s something in accounts payable and just give you this phrasing. And we’d have to say, Hmm, well, if that’s the case, we must have bought something on account in the past and therefore have a balance in accounts payable, showing that we owe something and neither To decrease that amount after we then pay off the amount we owe. If we look at the accounting equation, the assets are going down with the cash decreasing, the liabilities to are going down with the accounts payable decreasing and the equity remains the same. Equity remain in the same would imply that net income to remains the same meaning we had net income of 10,000 calculated as revenue minus expenses before the transaction. Nothing happened in this blue area. Neither of these two accounts been an expense or income account. And therefore we end with net income at that same 10,000.
Next transaction purchased auto service on account $320. So we’re going to purchase Auto Service first question is cash affected and the answer No, because we purchased it on account on account, typically means either accounts receivable or accounts payable. When considering something purchased, it means accounts payable. So we know accounts payable will be one account. But once again, it would be different little more difficult to know whether accounts payable is increasing or decreasing and whether to debit or credit it. And it might be easier for us to consider what we’d received, in this case that being Auto Service. Now we’re not talking auto the asset in this case, we’re talking auto the expense because it’s a service. So it’s going to be auto expense down here. Expenses might be a little bit more strange for us to memorize which way they’re going. But expenses are the most common type of accounts.
Remember that all the expenses we will be working with, meaning there’ll be more expenses than pretty much any other type of account. They all have debit balances, and they all only go up. So whenever you see an expense typically, you’re just going to debit it because it’s a debit balance account. They only go up Therefore they will increase in the debit direction. So it’s really good to get an idea that get a feel for that get used to that being the case after working with a cash transactions, we may not we may not, we may have kind of skipped what the expenses are actually doing when we record them because we know that we have to debit them because we credited cash but get used to knowing what the expenses are doing. There’s more expense accounts than any other type of account, they all basically do the same thing they all go up and only up in the debit direction, therefore the auto expense will go up in the debit direction. If we increase the auto expense, we need to credit something that something not to be in cash in this case because we bought it on account and therefore did not pay cash.
And we know that we bought on account and that means accounts payable, auto expense going up 320 to 320 and then we’ve got the accounts table at the credit of 300 20 Now we knew that the credit was going to go to accounts payable because we debited the auto expense. Now let’s think through it does it make sense that we are crediting accounts payable. Remember that accounts payable is a liability account, it is going up The bad thing is increasing the bill we owe to the accounts payable is increasing kind of like our credit card bill going up as we’re having purchasing something on account. And therefore we will do the same thing to it as its normal balance, which is a credit. Here’s the increase from zero up in the credit direction by 320 to 320 credit impact on the accounting equation, assets remaining the same, the liabilities increasing the equity decreasing. Why? Because net income is going down net income calculated as revenue minus expenses, expenses increasing bringing that equation that net income down Net Income then will decrease total equity as we just stated net income is decreasing.
And we see here we have the 10,000 credit before that calculated as revenue minus expenses 10,000 credit revenue minus zero debit expenses, we then have a debit of 320 bringing that calculation to 9006 at 10,000 revenue minus 320 expenses 9006 80 credit balance winning these brackets remember representing credit not representing negative number in this case. Next transaction, purchase meals and entertainment on account. First question is cash affected. In this case, no we purchase something but we purchased it on account and not with cash on account means either accounts receivable or accounts payable in this case because we are dealing with purchases We mean accounts payable. Accounts Payable is the account we will be using. But it might be difficult to know whether it goes up or down or to debit or credit might be easier to first consider what we have received that been meals and entertainment and expense.
And like all expenses, expenses have debit balances, and they only go up how do we make something go up, we do the same thing to it as its normal balance, which in this case would be a debit. So we’re going to debit the meals and entertainment as always, and also the meaning as always, the expenses always basically are debited. And once we know that, we’re going to do that we know that we are going to credit the other account of that other account not being cash not to decreasing the cash because we didn’t pay cash. We are increasing the liability instead, that liability being accounts payable. We already know that we credit accounts payable because we debit the meals and entertainment is expense, but we do want to double check that. And so let’s do that now. Accounts Payable has a credit balance, it needs to go up, the bad thing needs to go up our bills going up, our credit card balance is going up or our accounts payable is going up.
How do we make something go up, we do the same thing to it as its normal balance, which in this case is a credit. So if we post this out, then we have meals and entertainment increasing by 1500 to 1500. In the debit direction, we have accounts payable increasing from 320 by 1500. In the credit direction to 1820. accounting equation, assets remained the same liabilities increasing due to accounts payable going up and the equity decreasing due to expenses going up meals and entertainment the specific expense and that brings down net income calculated as revenue minus expenses. And if net income going down means total equity is decreasing.
Next transaction, we’re going to say that paid cash for auto service done on account in the past 320. First question is cash affected? We’re going to say yes, keyword paid, meaning cash is going down. Therefore, cash has a debit balance, how do we make it go down opposite thing to it, which in this case is a credit. So we would credit the cash. Remember that we have paid here and we also know have this on account. So don’t let the on account throw you off thinking that the paid doesn’t still mean cash. It does still mean cash cash is going down. Then we need to know what the debit will be. After knowing we’re going to credit cash. Also, remember, cash will go on the bottom because we are crediting it at this point. And we will think of cash first because it’s the easy account to think Have rather than trying to think of the debit first just because it’s on top, then we need to think what the debit will be. And in this case, we purchased something paid for something we had purchased auto expense, that’s something that we had purchased on in the past on account.
So remember on accounts means accounts receivable or accounts payable. In this case, we’re talking about purchasing. So we’re talking about accounts payable. So the debit is going to go to accounts payable. And so we already know that we’re going to debit the accounts payable because we credited cash. That’s why we start with cash, but let’s think it through accounts payable has a credit balance, we paid it off, we paid off the amount that we owe, and therefore that credit balance needs to decrease. How do we make something go down? We do the opposite thing to it as its normal balance. This being a normal credit balance, the opposite then a debit of 320 if we post this out, then we’re gonna say that the cash is decreasing from 49 550 minus to credit of 320 to 49 230. We know that the accounts payable then starting at a credit of 1820 decreasing by 320. Bringing that balance to 1500 effect on accounting equation is assets decreasing because cash went down, liabilities decreasing because accounts payable went down and the equity remaining the same effect on the net income none. Note that there’s no input neither of these accounts are revenue or expense accounts even though cash is going down no effect on net income. And we have the net income calculation still at the 10,000 credits, minus 1500 meals and entertainment debit minus the auto expense debit for the credits, winning revenue, beating expenses. Credits building debits on the income statement of 8180. That being the same in the beginning and ending of this transaction, we are now able to list transactions involving accounts payable record at transactions involving accounts payable using debits and credits. Explain the effect of transactions on assets, liabilities, equity, revenue, expenses and net income.