20 March 2017

How to debit and credit purchase of merchandise inventory

 

Merchandising companies debit the cost of merchandise to the Inventory account (an asset account) when the merchandise are purchased from the supplier. The Cost of Goods Sold account (an expense account) is debited to reflect the cost of merchandise sold to the customers.

 

This post is part of the “how to debit and credit” tutorials that illustrate how to record accounting transactions commonly occur in merchandising companies. What are merchandising companies? Merchandising companies buy and sell merchandise as their primary source of revenue. They purchase the merchandise from suppliers/vendors and then resell the merchandise to the customers.

Merchandising companies buy and sell merchandise as their primary source of revenue. They purchase the merchandise from suppliers/vendors and then resell the merchandise to the customers.

The customers may be either companies or individuals. Retailers are merchandising companies with end consumers as their primary customers. Wholesalers are another type of merchandising companies with retailers and other businesses as their primary customers.

What is inventory?

According to IAS 2, inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

A merchandising company may purchase inventory either using cash or credit. The purchase of merchandise inventory is usually recorded in the accounting system when the company receives the merchandise from the seller.

Each transaction is entered in accounting system based on business documents. In other words, the business documents serve as the written evidence. In fact, no transaction would be recorded without being supported by the business documents.

A canceled check or a cash register receipt is an example of business documents. A cash register receipt indicates the items purchased and amounts paid for each cash purchase. A company record cash purchases by increasing/debiting Inventory (an asset account) and decreasing/crediting Cash (another asset account).

A purchase invoice is another type of business documents to support credit purchase of inventory. The invoice usually contains data such as the items purchased, the unit, quantity and price of each item, the total purchase price as well as other relevant information. However, the purchaser usually does not prepare a purchase invoice. The purchaser uses a copy of the sales invoice sent by the seller as a business document to support the purchase transaction when it is entered to the accounting system.

The invoice illustrated below, extracted from Weygandt et al (2015), is an example of the purchase invoice used by Sauk Stereo (the buyer) as a purchase invoice. This invoice is originally sent by PW Audio Supply, Inc. (the seller).What is inventory?

 

How to debit and credit the purchase of merchandise inventory?

Assume that the purchase records of Shania Wholesale Corp reveal that the total credit purchases during January are $7,600,000. How to debit and credit the purchase of merchandise inventory?

The summary journal entry would be as follows:How to debit and credit the purchase of merchandise inventory?

Note that the entry above is the summary journal for a month. It means that the day-to-day purchase records are done elsewhere, for example, in the purchase journal. The credit purchase of inventory is an increase in an asset account (debit to Inventory) and an increase in a liability account (credit to Accounts Payable).

Not all purchases are debited to Inventory, however. Companies record purchases of assets acquired for use, not for resale, eg equipment, as increases to a specific asset account rather than to Inventory. For example, to record the purchase of equipment used in the office, companies may debit an Equipment account.

 

 

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02 March 2017

How to debit and credit revenue from services

 

What are revenues? Revenues are the gross increase in owner’s equity resulting from business activities. Revenues increase owner’s equity. An advertising company earns revenues from the advertising services provided to its clients.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In the basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

What is the meaning of revenues?

What are revenues? Revenues are the gross increase in owner’s equity resulting from business activities. Revenues increase owner’s equity. An advertising company earns revenue from the advertising services provided to its clients. Revenues usually result in an increase in an asset, such as cash, accounts receivable, notes receivable etc.

In a service company, we record service revenues when the services have been performed. In other case, we recognize unearned revenues (a type of liabilities) for cash received in advance for future services.

 

How to debit and credit service revenues?

On January 31, FAC receives $10,000 in cash from Eliza Company. The cash receipt is related to advertising services that have been provided in January.

 

Basic transaction analysis

Asset in the form of $10,000 cash arises. On the other hand, service revenue of $10,000 earned.

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In our illustration, the effects of the increase in cash and the increase in owner’s equity (revenue) can be shown in terms of the accounting equation as follows:How to debit and credit service revenues?

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. Since the cash is received from Eliza Company, we debit the Cash account $10.000.

According to the debit-credit rule, the increase in revenue is credited. The service has been performed in January. It means that the cash receipt has to be recorded as revenues for the current accounting period. Technically, the Service Revenue is credited $10,000.

How to debit and credit service revenues?

 

Journal entry

How to debit and credit service revenues?In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

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How to debit and credit salaries expenses

 

How to debit and credit salaries expense? Salaries and wages are some types of expenses that a company pays for after the services have been performed by the employees. Therefore, the salaries expense is usually recorded when cash is paid to the employees.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

 

Index of how to debit and credit tutorial

What are salaries and wages expenses?

As an employee, you will usually receive your salaries or wages after you work for your employees for a period of time (two weeks or one month). In accounting, the salaries and wages expense arise when the employees do their jobs. In practice, salaries and wages expense is recorded when cash is paid by debiting salaries and wages expense and crediting cash.

 

How to debit and credit salaries expenses?

On January 26, FAC owes its employee salaries of $4,000. It pays the salaries in cash. The employee was hired on January 9.

 

Basic transaction analysis

The service has been conducted by the employee from January 9 to January 26. Therefore, the salaries and wages expense account increases $4,000. On the other hand, the asset in the form of cash decreases $4,000.

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the increase in salaries and wages expense (decrease in equity) and the decrease in cash can be shown in terms of the accounting equation as follows:How to debit and credit salaries expenses?

 

Debit-credit analysis

According to the debit-credit rule, the increase in expenses is debited. From the accounting point of view, the Salaries and Wages Expense account is debited $4,000.

According to the debit-credit rule, the decrease in assets is credited. The salaries payment of $4,000 means the cash is no longer available in FAC. Technically, the Cash account is credited $4,000. How to debit and credit salaries expenses?

 

Journal entry

How to debit and credit salaries expenses?In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

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How to debit and credit withdrawal by owner

 

How to debit and credit withdrawals by owner? Withdrawals or dividends happen when the owner of a company draws cash or other assets for personal uses. The withdrawal transaction is basically the opposite of the owner investment transaction.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In the basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

What is an owner’s withdrawal transaction?

In a sole proprietorship, the owner may withdraw assets in the form of cash or other assets from the company for his/her personal use. Withdrawals may be debited to the owner’s capital account to indicate the decrease in owner’s equity. Alternatively, the withdrawals may be recorded in a separate account, called Owner’s Drawings. With the separate account, we can easily determine the total withdrawals made by the owner during the accounting period. Normally, the drawings account will have a debit balance.

 

How to debit and credit withdrawal by owner?

On January 20, S. Gomez (the owner) withdraws $500 asset in the form of cash from the company. The withdrawal is for her personal use.

 

Basic transaction analysis

The withdrawal transaction decreases owner’s equity. In our illustration, a contra-equity account, Owner’s Drawings, increases $500. An asset account, Cash decreases $500.

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the decrease in cash and the decrease in the owner’s equity can be shown in terms of the accounting equation as follows:How to debit and credit withdrawal by owner?

 

Debit-credit analysis

According to the debit-credit rule, the decrease in equity as a result of withdrawal by the owner may be debited directly to the owner’s capital account, S. Gomez, Capital $500. Alternatively, it may also be debited to the Owner’s Drawing $500.

The debit-credit rule also requires the decrease in assets to be credited. From the accounting perspective, the Cash account is credited $500.

How to debit and credit withdrawal by owner?

 

Journal entry

How to debit and credit withdrawal by owner?In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

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01 March 2017

How to debit and credit supplies purchase and the adjusting entry

 

How to debit and credit the purchase of supplies? Like prepaid insurance, accrual accounting treats purchase of supplies initially as an asset. Supplies are a common type of prepaid expenses. An adjusting entry is required at the end of the accounting period to report the supplies expense in the financial statement that reflects the use of supplies during the period.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

What are supplies in accounting?

Supplies, also called consumables, are recorded and reported as inventory, although they also can be considered as prepaid expenses. When a company purchases pens, paper, file folders, and ink cartridges for use in the office, and it is expected that they will not be used up entirely in the current accounting period, the purchase of such supplies should be recorded initially as an asset.

At the end of the period, an adjusting entry is made to record the cost of supplies used in the current period in the supplies expense account.

 

How to debit and credit the purchase of supplies?

On January 5, FAC purchases supplies of advertising materials from Metro Supply on credit. The supplies cost $2,500 and are estimated to fulfill the need for a 3-month starting from January.

 

Basic transaction analysis

The asset in the form of supplies of $2,500 arises. On the other hand, the liability in the form of Accounts Payable of $2,500 is incurred. The supplies purchase is entered to the accounting system as an asset since the benefit is anticipated to expand longer than the current accounting period (the month of January).

 

Accounting equation analysis

The accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the increase in Supplies and the increase in Accounts Payable can be shown in terms of the accounting equation as follows:How to debit and credit the purchase of supplies?

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. Since the supplies is expected to be used over three months (more than the accounting period of one month), we treat the purchase of supplies as an asset. From the accounting point of view, the Supplies account is debited $2,500.

According to the debit-credit rule, the increase in liabilities is credited. The purchase of supplies on account means the incurring of a liability. Technically, the Accounts Payable is credited $2,500.

How to debit and credit the purchase of supplies?

 

Journal entry

How to debit and credit the purchase of supplies?In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

When the debit to the Supplies account is posted to the general ledger, the Supplies account will have a debit balance of $2,500.

 

How to debit and credit the adjusting entry for supplies and supplies expense?

Assume that a physical inventory count on January 31 reveals that the supplies costing $1,000 remains on hand. Therefore, the supplies used is $1,500 ($2,500 – $1,000). The use of supplies means the decrease in an asset, Supplies. The use of supplies also means the decrease in owner’s equity by increasing an expense account, Supplies Expense.

The effects of the adjustment to the Supplies and Supplies Expense accounts can be shown using the accounting equation as follow:How to debit and credit the adjusting entry for supplies and supplies expense?

The adjusting entry for supplies expense at the end of January is illustrated as follows:How to debit and credit the adjusting entry for supplies and supplies expense?

After all debits and credits are posted to the general ledger, the Supplies account will have a debit balance of $1,000 reflecting the cost of supplies on hand, whereas the Supplies Expense account will have a debit balance of $1,500 reflecting the use of supplies during January.

Accordingly, the Supplies of $1,000 will appear as an asset in the statement of financial position at January 31 and the Supplies Expense of $1,500 will be reported as an expense in the statement of profit or loss for the month of January.

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26 February 2017

How to debit and credit prepaid insurance and the adjusting entry

 

Prepaid insurance is a common example of prepaid expenses. What is a prepaid expense? A prepaid expense is the payment of an expense that the benefit will expand over more than one accounting period. Although we call it “expense”, accrual accounting treats a prepaid expense initially as an asset. At the end of the accounting period, an adjusting entry is required to record the expired portion of the asset as an expense.

 

This post is part of the “how to debit and credit” tutorials that illustrate how to debit and credit accounting transactions. In the basic accounting tutorials, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

What is a prepaid expense?

A prepaid expense arises when a company pays cash advance to cover some expenses that the benefit will expand over more than one accounting period. Although it is called an “expense”, accrual-based accounting should record a prepaid expense or prepayment initially as an asset. At the end of the period, prepaid expense accounts usually require adjustments to reflect the “consumed” or “used-up” portion as expenses in the current period.

The most common examples of prepaid expenses are insurance expense, rent expense, and supplies expense.

 

How to debit and credit payment of prepaid insurance?

On January 4, FAC pays $600 for insurance policy. The insurance policy covers one-year period that means it will expire on December 31. How to debit and credit this transaction?

 

Basic transaction analysis

The asset in the form of prepaid insurance of $600 arises. The other asset, cash, decrease $600. The payment is recognized as an asset since it extends to more than the current accounting period (the month of January).

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the cash payment and the increase in prepaid insurance can be shown in terms of the accounting equation as follows:How to debit and credit payment of prepaid insurance?

The amount in parentheses means it has a subtracting effect or minus sign.

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. Since the payment is related to more than the accounting period of one month, we treat the payment as having future benefit. From the accounting point of view, the Prepaid Insurance account is debited $600.

According to the debit-credit rule, the decrease in assets is credited. The payment in cash means that the cash paid is no longer held by the company. Technically, the Cash account is credited $600.

How to debit and credit payment of prepaid insurance?

 

The journal entryHow to debit and credit payment of prepaid insurance?

In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

When the debit to the Prepaid Expense account is posted to the general ledger, the Prepaid Expense account will have a debit balance of $600.

 

How to debit and credit the adjusting entry for prepaid insurance and insurance expense?

Let us continue with the above illustration. The insurance policy of $600 covers one-year period as of December 31. It means that the insurance policy of $50 ($600 ÷ 12) will expire each month and should be recorded as an expense.

Using accounting terms, we can say that by the end of January, the Prepaid Expense account is decreased $50 and the Insurance Expense account is incurred $50. It can be shown using the accounting equation as follow:How to debit and credit the adjusting entry for prepaid insurance and insurance expense?

The adjusting entry for prepaid insurance and insurance expense at the end of January is illustrated as follows:How to debit and credit the adjusting entry for prepaid insurance and insurance expense?

After all debits and credits are posted to the general ledger, the Prepaid Insurance account will have a debit balance of $550 reflecting the cost of insurance policy that has not expired. On the other hand, the Insurance Expense account will have a debit balance of $50 reflecting the expired portion of the insurance policy during January.

Accordingly, the Prepaid Insurance of $550 will appear as an asset in the statement of financial position at January 31 and the Insurance Expense of $50 will be reported as an expense in the statement of profit or loss for the month of January.

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25 February 2017

How to debit and credit payment of rent expense

 

What is an expense? An expense is the cost of asset consumed or the cost of service used in the process of earning revenue. It is a component of profit or loss that decreases owner’s equity. In business, expenses arise from operating the company.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting level, we use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

Why does a company incur expenses?

A company incurs expenses as it consumes economic resources in the process of earning revenue. For example, the office used by an advertising company requires the use of electricity, services performed by employees, and office supplies. In accounting, expenses are recognized and recorded to reflect the cost of such resources that has been consumed or used up. On the other hand, the cost of resources that still has future benefits is recorded as assets.

 

How to debit and credit payment of rent expenses?

On January 3, FAC pays office rent for January in cash, $900. The occupational rent payments are agreed to be made monthly.

 

Basic transaction analysis

The asset of FAC in the form of $900 cash is no longer held by the FAC. On the other hand, the equity component, Rent Expense, arises. The payment is recognized as an expense since it only pertains to the current accounting period (the month of January).

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the cash payment and the incurring of rent expense can be shown in terms of the accounting equation as follows:How to debit and credit payment of rent expenses?

The amount of $900 is in parentheses. It is the conventional accounting notation to show subtracting effect or minus sign.

 

Debit-credit analysis

According to the debit-credit rule, the decrease in assets is credited. The payment in cash means that the cash paid is no longer held by the company. Technically, the Cash account is credited $900.

The debit-credit rule also requires the incurring of expenses to be debited in expense account. Since the rent payment is related to the month of January, the same accounting period, we treat the payment as being consumed by FAC. From the accounting point of view, the Rent Expense account is debited $900.

How to debit and credit payment of rent expenses?

 

Journal entry

How to debit and credit payment of rent expenses?In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Regularly, a batch of debit and credit amounts in the journal entries are posted to the relevant accounts in the general ledger.

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How to debit and credit unearned revenue

 

How to debit and credit unearned revenues? In accounting, unearned revenues are a type of liabilities. Unearned revenues arise when a company receives cash or other assets as an advance to render services or deliver goods in the future.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting level, we use the transactions of Frontier Advertising Company (FAC). As in the previous post, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

What is unearned revenue?

A company may receive cash as an advance from customers for delivering goods or services in the future. In practical sense, it means that the cash receipt implies the incurring of liability, an obligation to render services or deliver goods. In accounting, such an obligation is called unearned revenue. Although we say it “revenue”, the unearned revenue is considered and treated as liability.

 

How to debit and credit unearned revenue?

On January 2, FAC receives a $1,200 cash from J. Bieber. Bieber is the first client of FAC who agree to pay an advance for advertising services that are expected to be finished by March 31.

 

Basic transaction analysis

The asset of FAC in the form of $1,200 cash increases (becomes available for use), and the liability in the form of $1,200 Unearned Service Revenue is incurred. In this case, FAC incurs the liability because the advertising service has not been performed yet.

 

Accounting equation analysis

Accounting equation can be used to show the economic effects of an accounting transaction. It states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of the cash receipt and the incurring of unearned revenue can be shown in terms of the accounting equation as follows:

How to debit and credit unearned revenue?

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. The asset of $1,200 cash becomes available in FAC. In accounting terms, the Cash account is debited $1,200.

The debit-credit rule also requires the increase in liabilities to be credited. The incurring of obligation to perform future advertising service increases a liability, an Unearned Service Revenue of $1,200 in FAC. From the accounting point of view, the Unearned Service Revenue account is credited $1,200.

How to debit and credit unearned revenue?

 

Journal entry

How to debit and credit unearned revenue?In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Regularly, a batch of debit and credit amounts in the journal entries are posted to the relevant accounts in the general ledger.

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How to debit and credit purchase of equipment and the adjusting entry

 

In accounting, equipment is part of an asset category called property, plant and equipment, or fixed assets. When a company purchases a piece of equipment, the equipment account is debited. At the end of the accounting period, an adjusting entry is prepared, the depreciation expense is debited to reflect the use of the equipment during the period.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting level, we use the transactions of Frontier Advertising Company (FAC). As in the previous post, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

What’s happening when a company purchases an asset?

When a company purchases an asset such as supplies and equipment, it receives the asset from a supplier. If the purchase is for cash, the company pays cash to the supplier in exchange for the asset. If the purchase is on credit, the company incurs a liability. The most common liabilities are accounts payable and notes payable.

Equipment is part of an asset category called property, plant and equipment, or fixed assets. The main characteristics of property, plant and equipment are that they are tangible and have long lives. Other examples of property, plant and equipment are lands and buildings held by a company to facilitate its operations.

Depreciation is the process of allocating the cost of an asset to expense over its useful life. Except for lands, property, plant and equipment are depreciated at the end of the accounting period. Like supplies and insurance, the purchase of fixed assets can essentially be viewed as a long-term prepayment for the use of an asset. An adjusting entry for depreciation is needed to recognize the cost that has been used (an expense) during the period and to report the unused cost (an asset) at the end of the period.

The adjusting entry for equipment is prepared by (1) debiting the depreciation expense account and (2) crediting the accumulated depreciation account (a contra asset account) or directly crediting the equipment account (an asset account).

 

How to debit and credit the purchase of equipment?

On January 1, FAC buys some pieces of equipment to be used in the office. They cost $5,000 in total. FAC signs a note payable of $5,000, 3-month period, 12% interest, to complete the transaction. How to debit and credit the purchase of equipment?

 

Basic transaction analysis

The asset of FAC in the form of equipment valued at $5,000 increases (becomes available for use), and the liability in the form of $5,000 Note Payable is incurred.

 

Accounting equation analysis

The accounting equation is used to show the economic effects of an accounting transaction. The accounting equation states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of equipment purchase and the incurring of notes payable can be displayed in terms of the accounting equation as follows:

How to debit and credit the purchase of assets?

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. The equipment costing $5,000 become available in FAC. In accounting terms, the Equipment account is debited $5,000.

The debit-credit rule also requires the increase in liabilities to be credited. The purchase made on credit incurs a liability, a Note Payable of $5,000 in FAC. From the accounting perspective, the Notes Payable account is credited $5,000.

How to debit and credit the purchase of assets?

 

Journal entry

How to debit and credit the purchase of assets?

In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Regularly, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

When the debit amount is posted to the general ledger, the equipment account will have a debit balance of $5,000.

 

How to debit and credit the adjusting entry for depreciation on equipment?

Assume that depreciation on the equipment purchased by FAC on January 1 is $480 a year, or $40 per month. The effects of the equipment depreciation in terms of accounting equation are shown as follow:How to debit and credit the adjusting entry for depreciation on equipment?

The adjusting journal entry to recognize the depreciation expense on equipment for the month of January is illustrated as follows:adjusting-entry

After the debit and credit amounts are posted to the general ledger, the Accumulated Depreciation—Equipment account (the contra account of the Equipment account) will have a credit balance of $40. The balance is carried forward to the next accounting period. The carrying amount of equipment on January 31 is $4,960 ($5,000 - $40). The carrying amount is reported in the FAC’s statement of financial position as at January 31. The carrying amounts will diminish over time as the adjusting entries for depreciation are made at the end of each accounting period.

The Depreciation Expense account (an expense account) will have a debit balance of $40 reflecting the use of the equipment during the current period. The FAC’s statement of profit or loss for January will include the $40 depreciation on equipment in the determination of profit or loss for the period. As a temporary account, the Depreciation Expense account balance is closed/transferred to the profit or loss summary account. At the beginning of the next accounting period, the Depreciation Expense account will have a zero balance.

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24 February 2017

How to debit and credit investment by owner

 

How to debit and credit investments by owner? Investments made by the owner of a company increase its assets and the owner’s equity. In accounting, it means that an asset account is debited and the owner’s equity account is credited.

 

In this post and the other “how to debit and credit” tutorials, we will illustrate how to record transactions. For the basic accounting level, we will use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be illustrated (that is, the basic analysis, accounting equation analysis, and debit-credit analysis). Based on those analyses, we will show you how each transaction is entered to the general journal.

Index of how to debit and credit tutorial

What is the owner’s investment transaction?

In a sole proprietorship, the owner invests his/her personal assets when he/she decides to start a new business. The assets may take the form of cash, on hand or in the bank account, or other resources to be used in the business. For accounting purpose, the owner and his/her company are viewed as separate entities, and we will apply accounting for the owner’s investment transaction from the company’s perspective (the entity assumption).

 

How to debit and credit investment made by owner?

On January 1, S. Gomez (the owner) puts $10,000 cash in a new advertising company. The company is called Frontier Advertising Company (FAC).

 

Basic transaction analysis

The asset of FAC in the form of $10,000 Cash increases (becomes available), and the owner’s equity, S. Gomez, Capital, also increases $10,000.

 

Accounting equation analysis

The accounting equation can be used to show the economic effects of an accounting transaction. The total value of a company's assets must always equal the total value of its liabilities and its owners' equity.

In our illustration, the effects of cash receipt by the company and Gomez’s investment can be displayed in terms of the accounting equation as follows:

How to debit and credit investment by owner transaction

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. The $10,000 invested by S. Gomez makes the cash available in FAC. From the accounting point of view, the Cash account is debited $10,000.

According to the debit-credit rule, the increase in owner's equity is credited. The investment made by S. Gomez increases her equity in FAC. From the accounting point of view, the S. Gomez, Capital is credited $10,000.

How to debit and credit investment made by owner?

 

Journal entry

How to debit and credit investment made by owner?

In a manual accounting system, the journal entry is written down in a general journal book. The general journal book consists of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of the debits and credits of journal entries is posted to the relevant accounts in the general ledger.

In the next post, we will discuss how to debit and credit the purchase of assets.

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