Double Entry Accounting

In double entry accounting system, transactions are recorded in terms of:

credit (right side)- INCREASES A LIABILITY account or decreases an asset account.
debit (left side) is the opposite ^. INCREASES AN ASSET account or decreases a liability account.

To be in balance, the total of debits and credits for a transaction must be equal.
A debit may increase one account while decreasing another.
For example, a debit increases asset accounts but decreases liability and equity accounts, which supports the general accounting equation of Assets = Liabilities + Equity.

On the income statement, debits increase the balances in expense and loss accounts, while credits decrease their balances. Debits decrease revenue account balances, while credits increase their balances.

T - Account

Is also called "Ledger Account"

For the revenue account,

debit entries decrease the account,
credit record increases the account.

Expense Account

a debit increases
credit decreases it.

Asset account

debit increase
credit decrease

liability and shareholders’ equity

debit decrease
credit increase

Example:
If Barnes & Noble Inc. sold $20,000 worth of books,

debit its cash account $20,000 (company now has $20k more in cash)
credit its books inventory account $20,000. (company now has less inventory on its books)

A company that issues shares worth $100,000 will have its T-account

debit increase in its asset account
credit increase in its shareholder's equity account

Different Types of Accounts

Cash Account
Accounts Payable Account
Accounts Receivable Account
Notes Payable Account
Equipment Account
Prepaid Expenses Account
Expenses Account
Owner's Equity or Capital Account
Revenue Accounts

assets, liabilities, equity

revenue, expenses and withdrawals /dividends (all of these feeds to equity)

Assets

Accounts Receivable
Inventory
Prepaid Expenses

Liabilities

Accounts Payable
Salaries Payable
Long Term Loans

Common Account Types in Accounting

"Cash,"
"Accounts Receivable," - receivable future money
"Accounts Payable," - a financial obligation to pay money to other else
"Revenue," - immediate income generated by your business
(sales of goods or services)
"Expenses." - immediate decrease of money by your business
(rent, salaries, office supplies)

Why is accounts payable not expenses and instead a a liability?

When you think about it, when you're paying a supplier $100, then it should be in accounts payable which is correct but then it should be labeled as expenses right, and not a liability.

But the statement here said "the car wash pays a supplier $200 in cash". It didn't say, "oh i'm gonna pay the supplier later with $200 but I'm gonna get the item first"

Revenue Recognition Principle: Revenue is recognized when it is earned. (Credits and future received payments will be recognized as revenue and not accounts receivable) regardless of when cash is received or paid

Matching Principle: Expenses are recognized when they are incurred and matched to the revenue they help generate.

"A customer gets their car washed for $10. They pay on account with 30 day credit terms. Which account is credited?
a) Revenue
b) Cash
c) Accounts receivable
Hmm, revenue because we're using the revenue recognition principle. So what makes a transaction "Accounts receivable"

Created: 2023-10-14