Tutorial 1: Understanding how transactions are recorded in an Accounting System

The accounting report of specific asset, liability or owners’ equity item is recorded in an Account.
An account usually has 3 elements: the title, the debit side and the credit side. This form of account
is also known as the T-account.

As a rule, increases in asset accounts (such as cash receipts, account receivables) or decreases in
liabilities or owners’ equities, are recorded on the debit side. While decreases in asset accounts
(like cash payments, account payable) or increases in liabilities and owners’ equities, are recorded
on the credit side.
In summary, asset accounts normally have debit balances (i.e. the total debit is greater than the
total of credit). While liabilities and owner’s equity accounts normally have credit balances (i.e.
credits’ total exceed the debits’ total).
Transaction analysis and the duality concept
The duality concept refers to the system of double-entry accounting, which posits that any change
on the left side (or debit side) should be met with a commensurate change on the right side (credit
side) in order to ensure balance. For instance, if an asset account increases, because of duality
concept there must be a corresponding
1. increase in a specific liability account
2. or a decrease in another asset account
3. or an increase in owners' equity account.
This is to ensure that assets is equal to liabilities + owners’ equity as the fundamental accounting
equation states.
Example 1:
Wagner Excavating Inc. organized as a corporation on January 18 and engaged in the following
transactions during its first two weeks of operation:
 • Jan.18 - Issued capital stock in exchange for $400,000 cash.
• Jan. 22 - Borrowed $100,000 from its bank by issuing a note payable.
• Jan. 23 - Paid $200 for a radio advertisement aired on January 24.
• Jan. 25 - Provided $5,000 of services to clients for cash.
• Jan 26 - Provided $18,000 of serviced to clients on account.
• Jan. 31 - Collected $4,200 cash from clients for the services provided on January 26.
Record each of the following transactions in a general journal, and determine the balance in the
cash account on January 31. Be certain to state whether the balance is debit or credit.
Solution
Wagner Excavating Inc.
General Journal
Date Description Debit Credit
Jan. 18 • Cash $400,000
• Capital stock $400,000
Issued capital stock for $400,000
Jan. 22 • Cash $100,000
• Notes Payable $100,000
Borrowed $100,000 by issuing note payable
Jan. 23 • Advertising expense $200
• Cash $200
Paid for radio advertisement
Jan. 25 • Cash $5,000
• Service revenue $5000
Received cash for services
Jan. 26 • Account receivable $18000
• Service revenue $18000
Account receivable for service ($18,000)
Jan. 31 • Cash $4,200
• Account receivable $4200
Received cash for service delivered on Jan
26th

The balance of the cash account is $509,000 (i.e. 400,000 + 100,000 – 200 + 5000 + 18000 +
4200). Hence it is a debit balance because the total debit is greater than total credit.

Example 2: For each of these five account classifications shown as column headings in the table
below, where does an increase or decrease of each account classification be recorded—the debit
side or the credit side?

Revenue Expenses Assets Liabilities Owners Equity

Increases

Decreases
Solution

Here is a quick way to remember whether to record an account classification on the debit or credit
side:

ASSETS LIABILITIES OWNER’S EQUITY

Any account classification Any account classification that Any account classification that
that increases assets is increases liabilities is recorded increases owner’s equity is
recorded on the debit side. on the credit side. recorded on the credit side.

If it decreases assets, it is If it decreases liabilities, it is If it decreases owner’s equity, it

Revenue Expenses Assets Liabilities Owner’s Equity

Increases Credit Debit Debit Credit Credit

Decreases Debit Credit Credit Debit Debit

1. Revenue (Income)

Increases → Credit: An increase in revenue is recorded on the credit side, because revenue
increases owners' equity, and owners’ equity normally has a credit balance.

Decreases → Debit: If revenue decreases (e.g., a refund), it is recorded as a debit.

2. Expenses

Increases → Debit: An increase in expenses is recorded on the debit side because it reduces owners'
equity (profits) which normally follow a debit balance.

Decreases → Credit: If an expense is reversed (e.g., receiving a refund), it is recorded as a credit.

3. Assets

Increases → Debit: This is because Assets (e.g., cash, accounts receivable) normally have debit
balances.

Decreases → Credit: When an asset is reduced (e.g., paying cash), it is credited or recorded on the
credit side.

4. Liabilities
Increases → Credit: This is because Liabilities (e.g., loans, accounts payable) normally have a
credit balance.

Decreases → Debit: When a liability is settled (e.g., loan repayment), it is debited or recorded in
the debit side.

5. Owners' Equity

Increases → Credit: When Owners' equity increases (with retained earnings, revenue, capital
contributions etc.), it is recorded on the credit side.

Decreases → Debit: Owners' equity decreases when the company incurs losses or pays dividends
and it is debited.

Example 3: Janet Enterprises was incorporated on May 3rd in the current year. The company
engaged in the following transactions during its first month of operations.
• May 3: Issued capital stock in exchange for $950,000 cash.
• May 4: Paid May office rent expense of $1,800.
• May 5: Purchased office supplies for $600 cash. The supplies will last for several months.
• May 15: Purchased office equipment for $12,400 on account. The entire amount is due
June 15.
• May 18: Purchased a company car for $45,000. Paid $15,000 cash and issued a note
payable for the remaining amount owed.
• May 20: Billed clients $120,000 on account.
• May 29: Paid May utilities of $500.
• May 30: Received $90,000 from clients billed on May 20.
• May 31: Recorded and paid salary expense of $32,000.

Prepare journal entries for each of these transactions. Post each entry to the appropriate ledger
accounts for cash and accounts receivable accounts (use the T account format)

Solution
Janet Enterprises
General Journal
Date Description Debit Credit
May 3 • Cash $950,000
• Capital stock $950,000
Issued capital stock for $950,000
May 4 • Office rent expense $1800
• Cash $1800
Office Rent expense for month of May
 May 5 • Office supplies expense $600
• Cash $600
Purchased office supplies for $600 cash
May 15 • Office equipment expense $12,400
• Account payable $12,400
Purchased office equipment on account,
payment due by 15th of June
May 18 • Vehicles $45000
• Cash $15000
• Note payable $30000
Purchased office car ($45000), paid
($15000) and issued note payable ($30000)
May 20 • Account Receivable $120,000
• Client revenue $120,000
Account receivable for service
May 29 • Utilities $500
• Cash $500
Paid cash for May utilities
May 30 • Cash $90,000
• Account receivable $90,000
Received cash from service delivered on
May 20
May 31 • Salary expense $32000
• Cash $32000
Paid salary expense for May

Ledger Accounts for Cash and Accounts receivable

Cash Account

Janet Enterprises

Cash Account

Debit Credit

May 3 $950,000 May 4 $1800

May 30 $90,000 May 5 $600

May 18 $15,000

May 29 $500

May 31 $32,000

May 31 Balance = $990,100

Janet Enterprises

Account Receivable

Debit Credit

May 20 $120,000 May 30 $90,000

May 31 Balance = $30,000