Introduction to Accounting Part 1: Transactions

Algebra 1 Tutorial

Introduction to Accounting Part 1: Transactions

Intro

Accounting is recording transactions and summarizing data. A company has assets (like cash, inventory, patents, buildings, investments) that provide future benefits. The total value of the assets is made up of equity (money the company made or money owners put in) as well as liabilities (money the company borrowed). The accounting equation is assets=liabilities+equity: what a company has is what it borrowed or what it made/contributed.

A transaction involves recording things (usually) on both sides of the accounting equation. Gaining(losing) assets are recorded as debits(DR)(credits(CR)). Gaining(losing) liabilities/equity is recorded as credits(debits). Credits and debits should always be equal, and consequently the accounting equation always stays equal. Though not included here, transactions ALWAYS include dates and descriptions.

If a company pays an employee a $2,000 monthly salary, the transaction would be (DR) salary expense $2,000 (CR) cash $2,000 : expenses are equity losses (which are debits) and losing cash is an asset loss (which is a credit).

If you buy $25,000 of inventory the transaction would be recorded as (DR) inventory $25,000 (CR) cash $25,000 : we’re gaining the inventory asset (which is a debit) and losing the cash asset (which is a credit).

Sample Problem

For the following, describe the debits and credits for the following transactions:
1) A company borrows $100,000 from the bank
2) A company sold a building with value $250,000
3) A company sells $50,000 of shares
4) A company performs $2,000 of legal work but allows payment within the month (this IOU is an asset called an account receivable)

Solution

1) We gain $100,000 asset (cash) (DB) and gain a $100,000 liability (note payable)(CR)

2)We gain $250,000 asset (cash) (DB) and lose a $250,000 asset (building) (CR)

3)We gain $50,000 asset (cash) (DB) and gain $50,000 of equity (common shares) (CR)

4)We gain a $2,000 asset (account receivable) (DB) and gain $2,000 of equity (service revenue) (CR)



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