Hult International Business School - London

International Accounting

Handout 2 Debits & Credits, T Accounts,

Trial Balance
Module A - 2015 / 2016

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Debits & Credits (I)

Regardless of the type/name of the account ...
The Left hand side is the Debit side;
The Right hand side is the Credit side;

Depending on the type/name of the account ...

Increases / decreases are recorded on one or the other side of the
account.

Image source: http://blog.protectmyid.com/2010/06/07/credit-vs-debit/;

http://allisaccounting.blogspot.com/2012/02/important-to-know-about-debit-and.html

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Debits & Credits (II)

Following these Debit and Credit rules will insure
that:
Debit balances are equal the Credit balances;
Sum total of all Debits used to record each transaction will
equal the sum total of all Credits used;

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Debits & Credits Practice (I)

Image source: http://paceprep.wikispaces.com/Debits+and+Credit;

http://basicaccountingconcepts.wordpress.com/2012/03/31/making-sense-of-debits-and-creditsin-accounting/

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Debits & Credits Practice (II)

The Owners Equity account below can be further
separated into:

Common Stock,
Retained Earnings (which is the summary account for Revenues,
Expenses and Dividends).

Image source: http://www.learnaccounting.com/business_accounting/L1_2_double_entry_bookkeeping.php

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Permanent & Temporary Accounts

Accounts that must be closed at the

end of each fiscal year (they don't carry
any balance into the following year).

All income statement accounts

(revenues, expenses) as well as the
dividends or owner's drawing accounts.

Image source: http://hotelmule.com/html/77/n-2777-6.html

Accounts that remain open (do not

close at the end of the fiscal year.

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All balance sheet accounts (asset

accounts, liability accounts, owner's
equity accounts) except for the
dividends or owner's drawing accounts.

Temporary Accounts (II)

Shareholder's
Equity

Shareholder's
Equity

WinstonWolfe
Capital

WinstonWolfe
Capital

+21,000
+2,000
+500
+700
3,000
200
250
300

3,000
200
250
300
3,750

21,000
2,000
500
700
24,200
20,450

Why are temporary accounts

used ?

Temporary accounts are subdivisions

of the Shareholders Equity account .
Recording all (thousands of)
transactions directly into
Shareholders Equity account would
cause a mess at the end of the fiscal
year when time comes to prepare the
Income Statement.

20,450

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On the debit (left) side there are

expenses and dividends, but which is
which ?
On the credit (right) side there are
revenues and investments (common
stock), but which is which ?

Temporary Accounts Closing

Temporary accounts are kept for the duration of the fiscal year and
are closed at the end of the fiscal year.
Temporary accounts are closed by transferring their balances into
Retained Earnings account (one of two subdivisions of the permanent
Shareholders Equity account).
Accounts normally have positive balances.
Asset, Expense and Dividend accounts normally have a Debit
balance.
Liability, Revenue as well as Retained Earnings and Common Stock
accounts normally have a Credit balance.

-8-

Transactions (I) in T Accounts

Transaction impacting Shareholders Equity:
1. Shareholder (Winston Wolfe) starts a consulting business by contributing
$20,000 of cash and $1,000 office supplies to the business;
+

Cash
Debit
+
20,000

OfficeSupplies

Credit

Debit
+
1,000

CommonStock

Credit

Debit

Credit
+
21,000

2. WW contributes his workstation computer (worth $2,000) to the business;

Computer
Workstation
Debit
+
2,000

Credit

CommonStock
Debit

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Credit
+
2,000

Transactions (I) in T Accounts

Transaction impacting Shareholders Equity:
3. WW performs a service job for a Customer A and receives $500 from him.
Cash
Debit
+
500

Credit

Revenue(s)
Debit

Credit
+
500

4. WW performs another service job for a Customer B and is promised to be paid

$700 in the near future (no payment received yet).
A/R
Debit
+
700

=
Credit

Revenue(s)
Debit

-10-

Credit
+
700

Transactions (II) in T Accounts

Transaction impacting Shareholders Equity:
5. Shareholder (Winston Wolfe) takes $3,000 out of the business to use for home
improvement work around his house.
Dividends
Debit
+
3,000

Cash

Credit

Debit
+

Credit

3,000

6. WW pays the $200 monthly business internet bill.

Expense(s)
Debit
+
200

Cash

Credit

Debit
+

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Credit

200

Transactions (II) in T Accounts

Transaction impacting Shareholders Equity:
7. WW receives a $250 council tax bill for the month just ended and is payable in
two weeks time (no payment made yet).
Expense(s)
Debit
+
250

A/P

Credit

Debit

Credit
+
250

8. $300 of office supplies are used up (portion of an asset has become an expense).
Expense(s)
Debit
+
300

Credit

OfficeSupplies
Debit
+

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Credit

300

Transactions (III) in T Accounts

Transaction impacting Assets only:
9. WW purchases office supplies for $1,500 of company cash.
OfficeSupplies
Debit
+
1,500

Cash

Credit

Debit
+

Credit

1,500

10. WW sells $200 worth of office supplies to another party.

These office supplies originally cost $200.

Cash
Debit
+
200

Credit

OfficeSupplies
Debit
+

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Credit

200

Transactions (III) in T Accounts

Transaction impacting Assets only:
11. WW collects $500 worth of A/R balance from the transaction when services
were performed on account.
Cash
Debit
+
500

A/R

Credit

Debit
+

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Credit

500

Transactions (IV) in T Accounts

Transaction impacting Liabilities:
12. WW purchases another computer workstation for $2,000 and agrees to pay at
a later date (on account).
Computer
Workstation
Debit
+
2,000

A/P

Credit

Debit

Credit
+
2,000

13. $3,000 is borrowed from a bank.

Cash
Debit
+
3,000

Debt

Credit

Debit

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Credit
+
3,000

Transactions (IV) in T Accounts

Transaction impacting Liabilities:
14. WW pays off the council tax bill received earlier.
A/P
Debit

250

Cash

=
Credit
+

Debit
+

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Credit

250

Summarizing Account Balances

Summary of Cash account for Winston Wolfe:

$24.2K subtotal on the Debit side;

$4.95K subtotal on the Credit side;
$19.25K balance on the Debit side;

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Cash
Debit
+
20,000
500
200
500
3000
24,200
19,250

Credit

3,000
200
1,500
250
4,950

Summary of All Accounts

Cash

Tr.1
Tr.3
Tr.10
Tr.11
Tr.13

Debit
+
20,000
500
200
500
3,000
24,200
19,250

A/R

Credit

3,000
200
1,500
250

Tr.5
Tr.6
Tr.9
Tr.14

Tr.4

Debit
+
700
200

OfficeSupplies
Credit

500

Tr.11

Tr.1
Tr.9

Debit
+
1,000
1,500
2,500
2,000

Credit

300
200
500

Tr.8
Tr.10

Tr.2
Tr.12

Computer
Workstation
Debit
Credit
+

2,000
2,000
4,000
0

A/P

4,950

Tr.14

Debit

250
250

Credit
+
250
2,000
2,250
2,000

Debt
Tr.7
Tr.12

Tr.6
Tr.7
Tr.8

Credit
+
3,000
3,000

Debit

Tr.13
0

Expense(s)
Debit
+
200
250
300
750

Debit

CommonStock
Credit
+
21000
2,000
23,000

Revenue(s)

Credit

Debit

0
0

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Credit
+
500
700
1,200

Dividends
Tr.3
Tr.4

Tr.5

Debit
+
3,000
3,000

Credit

Tr.1
Tr.2

Summary of All Accounts Comments

Debit balances are equal the Credit balances;
Sum total of all Debits must equal the sum
total of all Credits;
It applies to every recorded transaction.
A list(ing) of balances for all accounts is called a
TRIAL BALANCE.

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Trial Balance
A trial balance is NOT a financial statement.

1.
2.
3.
4.

It is prepared in order to prove that account balance DO balance (that

Debits = Credits) before financial statements are prepared.
List the accounts that have balances in the ledger.
Separate Debit balances from Credit balances (by using separate columns).
Debit
Credit
List the amounts & add the balances.
Verify that Debits = Credits.

If they do not ... Find the mistakes.

Cash
A/R
OfficeSupplies
ComputerWorkstation
A/P
Debt
CommonStock
Dividends
Revenue(s)
Expense(s)
Total
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19,250
200
2,000
4,000
2,000
3,000
23,000
3,000
1,200
750
29,200

29,200