Whenever cash is received, the Cash account is debited (and another account is credited).

Whenever cash is paid out, the Cash account is credited (and another account is debited).

Cash (asset account)

Debit Increases an asset Received $ Credit Decreases an asset Paid $

Notes Payable (liability account)

Debit Decreases a liability Repaid loan Credit Increases a liability Borrowed more

On June 1, 2010 a company borrows $5,000 from its bank. This causes the company's asset Cash to increase by $5,000 and its liability Notes Payable to also increase by $5,000. To increase the asset Cash the account needs to be debited. To increase the company's liability Notes Payable this account needs to be credited. After entering the debits and credits the T-accounts look like this:

Cash (asset account) Debit Increases an asset Received $ June 1, 2010 ENTRY 5,000 Credit Decreases an asset Paid $

Notes Payable (liability account) Debit Decreases a liability Repaid loan Credit Increases a liability Borrowed more

5,000

ENTRY June 1, 2010

On June 2, 2010 the company repaid $2,000 of the bank loan. This causes the company's asset Cash to decrease by $2,000 and its liability Notes Payable to also decrease by $2,000. To reduce the asset Cash the account will need to be credited for $2,000. To decrease the liability Notes Payable that account will need to be debited. The T-accounts now look like this:

Cash (asset account) Debit Increases an asset Received $ June 1, 2010 ENTRY 5,000 2,000 June 2, 2010 BALANCE 3,000 ENTRY June 2, 2010 Credit Decreases an asset Paid $

Notes Payable (liability account) Debit Decreases a liability Repaid loan Credit Increases a liability Borrowed more 5,000 June 2, 2010 ENTRY 2,000 3,000 BALANCE June 2, 2010 ENTRY June 1, 2010

Another way to visualize business transactions is to write a general journal entry. Each general journal entry lists the date, the account title(s) to be debited and the corresponding amount(s) followed by the account title(s) to be credited and the corresponding amount(s). The accounts to be credited are indented. Let's illustrate the general journal entries for the two transactions that were shown in the Taccounts above.

Date June 1, 2010

Account Name Cash Notes Payable

Debit 5,000

Credit

5,000

Date June 2, 2010

Account Name Notes Payable Cash

Debit 2,000

Credit

2,000

Analysis of Transaction Steps 1 2 Increase in Assets (Cash) by $10,000 Increase in Owner's Equity by $10,000 Debit or Credit ? Debit Credit

Journal Entry Debit Cash Owner's Equity Description of Journal Entry Owner invested $10,000 in the company. Results of Journal Entry Cash balance increases by $10,000. --> Increase in Assets 10,000 10,000 Credit

Owner's Equity balance increases by $10,000. --> Increase in Owner's Equity

2-0The company borrowed $20,000 from a bank. Analysis of Transaction Steps 1 2 Increase in Assets (Cash) by $20,000 Increase in Liabilities (Borrowings) by $20,000 Debit or Credit ? Debit Credit

Journal Entry Debit Cash Borrowings 20,000 20,000 Credit

Description of Journal Entry Borrowed $20,000. Results of Journal Entry Cash balance increases by $20,000. --> Increase in Assets Borrowings balance increases by $10,000. --> Increase in Liabilities

The company purchased $12,000 equipment and paid in cash. Analysis of Transaction Steps 1 2 Increase in Assets (Equipment) by $12,000 Decrease in Assets (Cash) by $12,000 Debit or Credit ? Debit Credit

Journal Entry

Debit
Equipment

Credit

12,000 12,000

Cash

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 The company purchased $6,000 merchandise (600 units) on credit. Analysis of Transaction Steps 1 2 Increase in Assets (Merchandise) by $6,000 Increase in Liabilities (Accounts Payable) by $6,000 Debit or Credit ? Debit Credit

Journal Entry Debit

Merchandise

Credit

6,000 6,000

Accounts Payable

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

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 1 2 3 Increase in Assets (Cash) by $9,000 Increase in Assets (Accounts Receivable) by $2,000 Increase in Revenue (Sales) by $11,000 Debit or Credit ? Debit Debit Credit

(2) EXPENSE side Steps 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) Decrease in Assets (Merchandise) by $5,000 Debit or Credit ? Debit

Debit

(1) REVENUE Journal Entry Debit Cash Accounts Receivable Sales Revenue Description of Journal Entry Sold merchandise at $11,000 price and received $9,000 in cash. Results of Journal Entry 9,000 9,000 11,000 Credit

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 Cost of Merchandise Sold Merchandise 5,000 5,000 Credit

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 The company paid $3,500 salaries. Analysis of Transaction Steps 1 2 Increase in Expenses (Salaries Expense) by $3,500 Decrease in Assets (Cash) by $3,500 Debit or Credit ? Debit Credit

Journal Entry Debit Salaries Expense Cash 3,500 3,500 Credit

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

The company paid $1,500 rent. Analysis of Transaction Steps 1 2 Increase in Expenses (Rent Expense) by $1,500 Decrease in Assets (Cash) by $1,500 Debit or Credit ? Debit Credit

Journal Entry Debit Rent Expense Cash 1,500 1,500 Credit

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

Accounting Journal Entry Examples 01

* Cash payment transactions 1. Purchase of assets in cash 2. Repayment of liabilities in cash 3. Payment of expenses in cash * Cash receipt transactions 4. Sale of assets in cash 5. Borrowing money 6. Issuance of stock * Cash payment transactions 1. Purchase of assets in cash 1a. Purchased merchandise and paid $2,000 in cash 1b. Purchased an equipment and paid $15,000 in cash 2. Repayment of liabilities in cash 2a. Repaid $7,000 of bank loans 2b. Paid $3,000 accounts payable 3. Payment of expenses in cash 3a. Paid $3,500 rent expense 3b. Paid $6,000 salaries expense * Cash receipt transactions 4. Sale of assets in cash 4a. Sold merchandise and received $6,500 in cash The cost of merchandise sold was 5,100 4b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000 5. Borrowing money 5a. Borrowed $9,000 in cash 5b. Issued a promissory note and received $11,000 in cash 6. Issuance of stock 6a. Issued 500 shares of common stock, at $50 per share 6b. Issued 200 shares of preferred stock, at $80 per share

Cash payment transactions

2. Repayment of liabilities in cash 2a. Repaid $7,000 of bank loans debit borrowings cash 7,000 7,000 credit

debit: decrease in liabilities (borrowings) credit: decrease in assets (cash) 2b. Paid $3,000 accounts payable debit accounts payable cash 3,000 3,000 credit

debit: decrease in liabilities (accounts payable) credit: decrease in assets (cash) 3. Payment of expenses in cash 3a. Paid $3,500 rent expense debit rent expense cash 3,500 3,500 credit

debit: increase in expenses (rent expense) credit: decrease in assets (cash) 3b. Paid $6,000 salaries expense debit salaries expense cash 6,000 6,000 credit

debit: increase in expenses (salaries expense)

credit: decrease in assets (cash) Cash receipt transactions 4. Sale of assets in cash 4a. Sold merchandise and received $6,500 in cash debit cash sales debit: increase in assets (cash) credit: increase in revenue (sales) The cost of merchandise sold was 5,100 debit cost of goods sold merchandise debit: increase in assets (cash) credit: increase in revenue (sales) 4b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000 debit cash equipment gain on sale of equipment debit: increase in assets (cash) credit: increase in revenue (sales) 5. Borrowing money 5a. Borrowed $9,000 in cash debit credit 8,600 8,000 600 credit 5,100 5,100 credit 6,500 6,500 credit

cash borrowings

9,000 9,000

debit: increase in assets (cash) credit: increase in liabilities (borrowings) 5b. Issued a promissory note and received $11,000 in cash debit cash notes payable 11,000 11,000 credit

debit: increase in assets (cash) credit: increase in liabilities (notes payable) 6. Issuance of stock 6a. Issued 500 shares of common stock, at $50 per share debit cash Common stock 25,000 25,000 credit

debit: increase in assets (cash) credit: increase in equity (common stock) 6b. Issued 200 shares of preferred stock, at $80 per share debit cash Preferred stock 16,000 16,000 credit

debit: increase in assets (cash) credit: increase in equity (preferred stock)