Debit or Credit ? 1 Increase in Assets (Cash) by $10,000 Debit 2 Increase in Owner's Equity by $10,000 Credit
Journal Entry
Debit Credit Cash 10,000 Owner's Equity 10,000
Description of Journal Entry
Owner invested $10,000 in the company.
Results of Journal Entry
Cash balance increases by $10,000. --> Increase in Assets Owner's Equity balance increases by $10,000. --> Increase in Owner's Equity
Example 2: Financing Activities
May 3 The company borrowed $20,000 from a bank.
Analysis of Transaction Steps
Debit or Credit ? 1 Increase in Assets (Cash) by $20,000 Debit 2 Increase in Liabilities (Borrowings) by $20,000 Credit
Journal Entry Debit Credit Cash 20,000
Borrowings
20,000
Description of Journal Entry
Borrowed $20,000.
Results of Journal Entry
Cash balance increases by $20,000. --> Increase in Assets Borrowings balance increases by $20,000. --> Increase in Liabilities
Example 3: Investing Activities
May 6 The company purchased $12,000 equipment and paid in cash.
Analysis of Transaction Steps
Debit or Credit ? 1 Increase in Assets (Equipment) by $12,000 Debit 2 Decrease in Assets (Cash) by $12,000 Credit
Journal Entry
Debit Credit
Equipment 12,000
Cash 12,000
Description of Journal Entry
Purchased $12,000 equipment in cash.
Results of Journal Entry
Equipment balance increases by $12,000. --> Increase in Assets Cash balance decreases by $12,000. --> Decrease in Assets
Example 4: Operating Activities
May 8 The company purchased $6,000 merchandise (600 units) on credit.
Analysis of Transaction Steps
Debit or Credit ? 1 Increase in Assets (Merchandise) by $6,000 Debit 2 Increase in Liabilities (Accounts Payable) by $6,000 Credit
Journal Entry
Debit Credit
Merchandise 6,000
Accounts Payable 6,000
Description of Journal Entry
Purchased $6,000 merchandise on credit.
Results of Journal Entry
Merchandise balance increases by $6,000. --> Increase in Assets Accounts Payable balance increases by $6,000. --> Increase in Liabilities
Example 5: Operating Activities
May 15 The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in cash at the time of sale.
Analysis of Transaction Note: This transaction includes both "REVENUE" and "EXPENSE" components.
(1) REVENUE side Steps
Debit or Credit ? 1 Increase in Assets (Cash) by $9,000 Debit 2 Increase in Assets (Accounts Receivable) by $2,000 Debit 3 Increase in Revenue (Sales) by $11,000 Credit
(2) EXPENSE side Steps
Debit or Credit ? 1 Increase in Expenses (Cost of Merchandise Sold) by $5,000 ($6,000 / 600 units = $10 per unit) ($10 per unit X 500 units sold = $5,000 cost) Debit 2 Decrease in Assets (Merchandise) by $5,000 Debit (1) REVENUE Journal Entry
Debit Credit Cash 9,000 Accounts Receivable 2,000
Sales Revenue 11,000 Description of Journal Entry
Sold merchandise at $11,000 price and received $9,000 in cash.
Results of Journal Entry
Cash balance increases by $9,000. --> Increase in Assets Accounts Receivable balance increases by $2,000. --> Increase in Assets Sales Revenue account balance increases by $11,000. --> Increase in Revenue
(2) EXPENSE Journal Entry
Debit Credit
Cost of Merchandise Sold 5,000
Merchandise
5,000
Description of Journal Entry
To record the cost of merchandise sold.
Results of Journal Entry
Merchandise balance decreases by $5,000. --> Decrease in Assets Cost of Merchandise Sold account balance increases by $5,000. --> Increase in Expense
Example 6: Operating Activities
May 25 The company paid $3,500 salaries.
Analysis of Transaction Steps
Debit or Credit ? 1 Increase in Expenses (Salaries Expense) by $3,500 Debit 2 Decrease in Assets (Cash) by $3,500 Credit
Journal Entry
Debit Credit
Salaries Expense 3,500
Cash 3,500
Description of Journal Entry
Paid $3,500 salaries.
Results of Journal Entry
Cash balance decreases by $3,500. --> Decrease in Assets Salaries Expense account balance increases by $3,500. --> Increase in Expenses
Example 7: Operating Activities
May 26 The company paid $1,500 rent.
Analysis of Transaction Steps
Debit or Credit ? 1 Increase in Expenses (Rent Expense) by $1,500 Debit 2 Decrease in Assets (Cash) by $1,500 Credit
Journal Entry
Debit Credit
Rent Expense 1,500
Cash
1,500
Description of Journal Entry
Paid $1,500 rent.
Results of Journal Entry
Cash balance decreases by $1,500. --> Decrease in Assets Rent Expense account balance increases by $1,500. --> Increase in Expenses
Summary of Transactions
No. Date Transactions (1) May 1 Owner invested $10,000 in the company. (2) May 3 Borrowed $20,000 from a bank. (3) May 6 Purchased $12,000 equipment in cash. (4) May 8 Purchased $6,000 merchandise (600 units) on credit. (5) May 15 Sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in cash at the time of sale. (6) May 25 Paid $3,500 salaries. (7) May 26 Paid $1,500 rent.
Summary of Journal Entries
No. Journal Entries Debit Credit
(1) Cash 10,000 (1) Owner's Equity 10,000 Owner invested $10,000 in the company.
Balance Sheet As of May 31, 20XX Assets Liabilities and Owner's Equity
Cash $ 22,000
Accounts Payable $ 6,000
Accounts Receivable 2,000
Borrowings 20,000
Merchandise 1,000
Equipment 12,000
Owner's Equity 11,000 (*1)
Total Assets $ 37,000 Total Liabilities and Owner's Equity $ 37,000
Income Statement For the Period from May 1 to May 31, 20XX
Revenue
Sales $ 11,000
Total Revenue
$ 11,000
Expenses
Cost of Goods Sold $ 5,000
Salaries Expense 3,500
Rent Expense 1,500
Total Expenses
10,000
Net Income
$ 1,000 (*2) (*1) Owner's Equity=Investment by Owner+Net Income=$10,000+$1,000=$11,000 (*2) Net Income = Total Revenue - Total Expenses = $11,000 - $10,000 = $1,000