Hello in this presentation we are going to record business transactions involving cash using debits and credits. At the end of this, we will be able to list transactions involving cash record transactions involving cash using debits and credits and explain the effect of transactions on assets, liabilities, equity, revenue, expenses and net income. We’re going to record these transactions on the left hand side in accordance with our thought process. We’re then going to post them to a worksheet format, not necessarily or in this case, not a general ledger. But in a similar way, we will post it to this worksheet in order to see what is happening to each of these accounts individually as well as the groups of accounts in terms of assets, liabilities, equity, revenue and expenses, notes the order of the trial balance, always in the order of acids in this case in green liabilities in orange, and then we have the equity and revenue and expenses, the income statement accounts and net income at the bottom calculated as revenue minus expenses.
We’re going to start with transactions that will include cash because cash is going to be that account we’ll get most familiar with. It’s our first question in our thought process. Once we understand what is going on with cash, then we can understand what is going on with the second component of the transactions. first transaction that says, owner deposits cash into a business. This is typically going to be one of the first transactions that will happen within a business and within a many types of book problems that we’re having a longer comprehensive book problem. First question is cash affected. We’re going to say yes, the owner deposits cash into the business. Cash is affected. Cash is going up because there is a deposit into the business. This cache has a normal debit balance, in order to make any account to go up, we do the same thing to it as its normal balance, which in this case would be another debit. So we’re going to think about cash first. And we’re going to think about the idea that we need to debit the cash account. And that’s we’re going to write that down as we go.
So whether we’re doing this in Excel or by hand, even if it’s a problem, where they don’t give us the numbers, I would write down the fact that we are going to debit to cash first, and then think about the second component. If we were to post this out, then we’re starting at zero, we’re going in the debit direction 100,000 to 100,000, we then need a credit of something and we just need to know what that credit account will be. The person who put the money in, in this case is the owner. Therefore we’re not crediting revenue because it wasn’t a customer that gave us the money. It’s going into the owner capital accounts. In this case, if it was a corporation note that this would be the type of transaction would Be the purchase or selling a stock investors purchasing stock within the corporation, the common stock would be the credit, there’s going to be the credit, credit increasing.
Note that we knew that we were going to have the credit, because we debited cash and therefore must have credit some other accounts if there’s only one other account affected as there is in this case, but we want to double check ourselves so that we better understand this second account here. In order to double check ourselves we’re going to say, is the capital account a debit or credit, normal balance? It’s a credit normal balance, should it be going up or down a bit more difficult to know than the cash account. That’s why we focused on cash first as to whether the capital account should be going up or down. But it should be going up because the company owes the owner more money in this case, or the net value of the company has increased. How do we make something go up we do the same thing to it as it’s normal. balance, which in this case would be a credit.
Note that here I have the debits and credits in terms of the debit and credit column and credits in brackets. Over here, we just have the credits represented in brackets. So we have an adjusting entry, a debit and a credit. And then we have the ending balance, a debit and a credit. This is very useful when we work with a worksheet like this. And that’s why I want to get used to this kind of worksheet, it will very much simplify the worksheet and if you use formulas within Excel, which I highly recommend doing, then it will simplify those formulas as well. Assets are increasing, nothing’s happening to the liabilities and equity is increasing. net income however, is staying the same note that nothing is happening to the revenue or expense accounts. Therefore nothing’s happening to net income although equity and the whole income statement is kind of part of equity remember is going up Due to the capital going up next transaction, we’re going to say receive cash for work completed. So first question we will have here is cash affected, and of course the key word is received.
So we’re going to say yes, received cash cash is going, is it going up or down? Of course, it’s going up because we received cash. How do we make something go up, we do the same thing to it as its normal balance. Cash has a debit normal balance represented by the fact that it does not have brackets in this case. Therefore in order to make it go up, we will do the same thing, another debit. So we’re going to debit cash. If we were to post that out, then we have the 10,000 increasing the debit balance by another debit to a debit of 110,000. We now know that we’re going to credit something for that 10,000 and just need to know what that credit should go to. And we have done work meaning we have earned in this case, revenue so we earn revenue.
When we do the work, people paid us cash at the same point in time that the work was completed. In this case, therefore, we have cash and revenue happening at the same time, revenue being recognized under the revenue recognition principle, because we had completed the work at this point in time. If we were to post that out 10,000 increasing in the credit direction. We knew that we’re going to credit revenue over here because we debited cash. But we also want to think through that and see if it makes sense. We know that revenue has a credit balance. We also know that revenue only goes up, meaning customers don’t pay us we only pay customers, net income will go down, but net income goes down. When expenses go up. net income doesn’t go down because generally revenue goes down because revenue typically doesn’t go down. So note that the entire income statement revenue and expenses typically only go up and the net income is calculated as revenue minus expenses.
Therefore, how do we We make revenue go up, we do the same thing as its normal balance, which in this case would be a credit. Once again, note the credits represented by brackets here, this not being a negative number for our purposes in terms of debits and credits, but representing an increase in the credit direction. accounting equation, assets are going up because the cash went up, liabilities remaining the same equity increasing because equity is going to do the same thing as net income. net income is calculated as revenue minus expenses and net income went up because revenue went up, therefore total equity is going up. Note that of course, net income is going up as we just said here because the revenue is increasing and net income calculated as revenue minus expenses. Next transaction paid employee wages of 30,001st question is cash affected. We’re going to say that cache is affected, and is it going up or down? In this case, we’re going to say it’s going down key word paid.
When we say paid, we usually mean paid with cash. And of course, the cash would be decreasing. If something were then paid. How do we make cash go down, we do the opposite thing to it as its normal balance, its normal balance being a debit means that we will do the opposite of a credit to make it go down. Note here that we’re going to put the credit on the bottom, I’m leaving a space to put something on top credits typically go on the bottom. It is a convention that the debits go on top credits go on the bottom. Because of that convention, however, it’s not required that we work from top to bottom left to right. I would recommend working in any way that’s easiest for us to work. It’s easiest to think about cash first, and therefore think about cash first, and put that transaction on the bottom.
Also note that this idea of having debits on the top and credits on the bottom is really only a convention, if you had them in the right column, and formatted in whatever way is the correct way in accordance to what you’re working with, then it wouldn’t really matter that the debits are on top or the or the credits are on top. But it’s a convention that we do want to follow as much as possible. And it is a convention for computer programming. I think that’s that’s part of the convention and part of the reasoning for it. If we were to program a computer code, the computer would need to know what it wants to put on top typically, and typically the debits will go on top. If, however, we’re constructing a more difficult journal entry, a longer journal entry, as we will do later, we might deviate from this convention, if we’re doing something like an audit, and we want it to be able to go back to that journal entry and read it and figure out exactly what we did, then it would be better for us to construct that transaction in a way that we can then interpret it in which we as human beings could read it and interpret it and understand what we did and why.
We did it. But we’re going to stick with a convention as much as possible. Just note that we’re going to work with what we think is best to do or easiest to do crediting cash that in this case, and that will mean that we’re going to debit something and we just need to know what that debit will be posting out the cash transaction, we have a debit balance, normal balance of 110. We’re doing the opposite thing to it, crediting it, bringing the balance down to 109 400. We’re then going to debit wages expense. So wages expense will be debited down here, it’s an expense account, they always go up in the debit direction. Note that we knew we were going to debit wages expense because we credited cash. That’s why we always start with cash, but we want to think through it. Now we’re going to say wages expense. Wages expense is an expense. All expenses have normal debit balances.
All expenses typically only go up. For example, the employees don’t typically pay us we pay the employees the bill doesn’t usually pay us we pay the utility bill. So we’re always going to increase expenses in the debit direction. And that’s always going to decrease net income, that’s always going to decrease the owner capital or the total equity, I should say. So in this case, we’re saying that assets went down and liabilities remained the same. And we’re saying that the equity section is going down, because expenses went up, bringing net income down, net income calculated as revenue minus expenses. So here we see that net income is decreasing. And that’s represented by the 600. So we were at 10,000 minus the 600 brings us to 9400. The 10,000 minus the 600.
Received next transaction received Cash for Work that will be done in the future. 15,000. In this case, we’re going to say is well, not all cases were first question is cash affected? Yes. Is it going up or down? Oh, Key word received cash, how do we make cash go up? How do we make anything go up, we do the same thing to it as its normal balance, normal balance for cash being a debit means we will debit cash. So we’re going to say cash is going up, then we know we’re going to credit something, we just then need to know what we are going to credit. In this case, the work is done in the future. So whenever we get cash, it’s typically going to be from the customer. But we can’t always credit revenue, we need to know when the work was done. That being the driving factor when on an accrual basis, the accrual basis driven by the revenue recognition principle saying that we recognize revenue when earned. So it’s not when we received the cash. In this case, we’re saying we got that we’re going to do the work in the future. So we haven’t done the work yet.
So even though we got cash, I cannot credit revenue, and therefore must credit something else. That’s something else in this case is unearned revenue. It’s a liability account. So Cash is going to increase with the debit. So doing the same thing to it increasing in the liability account is going to be unearned revenue. Now, again, if we could figure out that it’s unearned revenue, we already know that we’re going to credit it. But we do want to think about that and say, why would that be the case. And in this case, we owe something in the future we owe work in the future, or we owe that money back. And therefore that’s going to be the definition of it. A liability is something that we owe in the future, because of a transaction that happened in the past. Therefore, we’re increasing the liability. Liabilities typically have credit balances or always have credit balances, we need to make it go up, The bad thing is increasing by doing the same thing to it as its normal balance, which in this case is a credit. So that’s the justification there.
We see now that assets are going down, liabilities are going up, equity remaining the same, no effect on net income, no effect on revenue and expenses, even though we got Cash because we have not yet earned that cash we have received not yet earned the revenue. Next transaction paid cash for utilities $750. First question is cash affected? We’re going to say cash is affected? Is it going up or down? It’s going down key words paid cash. Therefore, cash has a debit balance. How do we make any accounts go down, we do the opposite thing to it as its normal balance. Cash has a debit normal balance the opposite then a credit. We’ll start off with the credit to cash. Remember that we’re going to leave a space and put the credits on the bottom. We’re going to start with the credit even though it’s not the first thing in the rows from left to right top to bottom, because it’s the easiest thing to think about posting that out.
Then we’ll bring the balance in cash from a debit of 124 400 minus the credit of 752 123 650 we then need to debit something. And in this case that something would be utilities expense. So utilities expense, we already knew that we were going to debit it because we credited cash. That’s the point of crediting cash. But we also want to think through it, we know that utilities is an expense, all expenses have debit balances, and they only go up in the debit direction. Therefore, we’re going to increase utilities expense by doing the same thing to it, in this case, another debit. So we increase the utilities expense, assets then going down from this transaction, the liabilities remaining the same, and the equity decreasing because net income is going down, net income calculated as revenue minus expenses, and therefore going down bringing total equity down.
Net income here going down, it was at 9400, we declared We increased the expense decreasing net income to 8006 50 net income calculated as 10,000 minus 600 minus 750. total equity being the 100,000 plus the 10,000 minus the 600 minus the 750. Next transaction, paid cash for supplies. First question is cash affected, we’re going to say yes, cash is affected, cash is going down. key words paid. Therefore, we’re going to do the opposite thing to it as its normal balance this case that being a credit, we’re going to put the credit on the bottom, we then know we’re going to debit something that debit being what we purchased will be supplies. So supplies in this case is we had to debit it because we credited cash, but we want to think through it. Supplies is an asset account. It’s going to be increasing we got more of it. assets like cash have debit better. balances, we need to make it go up and therefore are doing the same thing to it as its normal balance, which is another debit.
So we’re kind of justifying or double checking that amount. There’s the increase they’re bringing the balance up the effect on the accounting equation, assets are going up, but also going down no net effect on the accounting equation one assets increasing one decreasing liabilities remaining the same equity remaining the same. Once again, net income also remaining the same. The supplies going on the books as an asset because it has not yet been used, not consumed in order to help generate revenue and therefore not yet expensed. We are now able to list transactions involving cash record transactions involving cash using debits and credits and explain the effect of transactions on assets liabilities, equity, revenue, expenses and net Income