DEBIT & CREDIT BOOKKEEPING PART 2
Introduction
Professor Brian Boucher welcomes viewers to "the second part of our debit and credit extravaganza."
Overview of what to expect:
Review of key concepts through examples.
Practice with journal entries focused on debits and credits.
Example 1: Increasing an Asset and Increasing a Liability
Transaction: Receive $100 cash from a bank loan.
Accounts involved: Cash and Notes Payable.
Cash (Asset) increases by $100.
Notes Payable (Liability) increases by $100.
Balance Sheet Equation:
Assets = Liabilities + Equity.
Assets increased by $100 (Cash); Liabilities increased by $100 (Notes Payable); Equity remains unchanged.
Journal Entry:
Debit Cash $100 (Assets are debit accounts, and this debit indicates an increase).
Credit Notes Payable $100 (Liabilities are credit accounts, and this indicates an increase).
T-Accounts:
Cash T-account shows a debit entry of $100.
Notes Payable T-account shows a credit entry of $100.
Total for Balance Sheet shows Assets of $100 and Liabilities of $100, balancing with no equity.
Example 2: Decreasing an Asset and Decreasing a Liability
Transaction: Repay $20 of a bank loan.
Accounts involved: Cash and Notes Payable.
Cash decreases by $20; Notes Payable decreases by $20.
Balance Sheet Equation:
Assets decreased by $20 (Cash); Liabilities decreased by $20 (Notes Payable); no effect on equity.
Journal Entry:
Debit Notes Payable $20 (decreasing a liability).
Credit Cash $20 (decreasing an asset).
T-Accounts:
Notes Payable T-account shows a debit entry of $20.
Cash T-account shows a credit entry of $20.
Total shows Cash of $80 in assets, Notes Payable of $80 in liabilities, and no stockholders' equity, maintaining the balance.
Example 3: Increasing One Asset and Decreasing Another Asset
Transaction: Paid $10 in cash for inventory.
Accounts involved: Cash and Inventory.
Cash decreases by $10; Inventory increases by $10.
Balance Sheet Equation:
Cash goes down by $10; Inventory goes up by $10, so total assets remain the same.
Journal Entry:
Debit Inventory $10 (making asset go up).
Credit Cash $10 (making asset go down).
T-Accounts:
Inventory shows a debit balance of $10.
Cash shows a credit balance of $10.
Total results in $70 in Cash and $10 in Inventory, balancing assets at $80.
Example 4: Increasing a Liability or Equity and Decreasing Another Liability or Equity
Transaction: Issue $80 in common stock to pay off a bank loan.
Accounts involved: Common Stock and Notes Payable.
Common Stock (Equity) increases by $80; Notes Payable (Liability) decreases by $80.
Balance Sheet Equation:
Liabilities decrease by $80; Equity increases by $80, with no assets involved.
Journal Entry:
Debit Notes Payable $80 (decreasing liability).
Credit Common Stock $80 (increasing equity).
T-Accounts:
Notes Payable T-account shows a debit entry of $80.
Common Stock T-account shows a credit entry of $80.
The balance sheet maintains its equilibrium with Assets = $70, Liabilities = $0, Equity = $80.
Journal Entry Practice
First Transaction:
BOC issues 10,000 shares of $5 par value stock for $15 cash per share.
Accounts involved:
Cash increases: Debit Cash = $150,000 (calculated as $15 * 10,000 shares).
Common Stock increases: Credit Common Stock at par = $50,000 ($5 par value * 10,000 shares).
Additional Paid-in Capital = $100,000.
Total debits = Total credits = $150,000.
Observation: Yes, there can be more than one credit or debit in a journal entry, as long as the debits equal the credits.
Second Transaction:
BOC acquires a building costing $500,000, pays $80,000 cash, assumes a mortgage for balance.
Accounts involved:
Buildings increase: Debit Buildings = $500,000.
Cash decreases: Credit Cash = $80,000.
Mortgage Payable increases: Credit Mortgage Payable = $420,000 (derived balance).
Total debits = Total credits = $500,000.
Third Transaction:
BOC obtains a three-year fire insurance policy, paying $3,000 premium in advance.
Accounts involved:
Prepaid Insurance increases: Debit Prepaid Insurance = $3,000.
Cash decreases: Credit Cash = $3,000.
Total debits = Total credits = $3,000.
Fourth Transaction:
BOC acquires office supplies costing $20,000 and merchandise inventory costing $35,000 on account.
Accounts involved:
Office Supplies increase: Debit Office Supplies = $20,000.
Inventory increases: Debit Inventory = $35,000.
Accounts Payable increases: Credit Accounts Payable = $55,000.
Total debits = Total credits = $55,000.
Fifth Transaction:
BOC pays $22,000 to suppliers.
Accounts involved:
Accounts Payable decreases: Debit Accounts Payable = $22,000.
Cash decreases: Credit Cash = $22,000.
Total debits = Total credits = $22,000.
Sixth Transaction:
BOC exchanges a building valued at $200,000 for land.
Accounts involved:
Land increases: Debit Land = $200,000.
Building decreases: Credit Building = $200,000.
Total debits = Total credits = $200,000.
Seventh Transaction:
BOC retires $1,000,000 of debt by issuing 100,000 shares of $5 par value stock.
Accounts involved:
Notes Payable decreases: Debit Notes Payable = $1,000,000.
Common Stock increases: Credit Common Stock = $500,000.
Additional Paid-in Capital increases: Credit Additional Paid-in Capital = $500,000.
Total debits = Total credits = $1,000,000.
Eighth Transaction:
BOC receives $600 for an order of merchandise worth $6,000, to deliver later.
Accounts involved:
Cash increases: Debit Cash = $600.
Advances from Customers (liability) increases: Credit Advances from Customers = $600.
Total debits = Total credits = $600.
Final Transaction:
BOC declares and pays $8,000 in cash dividends.
Accounts involved:
Cash decreases: Credit Cash = $8,000.
Retained Earnings decreases: Debit Retained Earnings = $8,000.
Total debits = Total credits = $8,000.
Conclusion
Emphasis on practice of journal entries with transactions representing debits and credits.
Upcoming sessions will involve extended case studies to reinforce methods of debits and credits in accounting operations.
Encouragement for students to engage with future content for better understanding.