Objective 2 – Determining the difference between debits and credits, and which side receives different entries (Assets = Liabilities + Equity). The equation that many consider the foundation in accounting is Assets = Liabilities + Equity. Assets = an item or items which include: cash, accounts receivable, inventory, equipment, buildings, and real estate Liabilities = an item or items which include: loans, accounts payable, mortgages, and revenues deferred to be paid out in services or products at a later time Equity = the ownership of any asset after all debts have been paid off for that asset Double-Entry Accounting Defined A double-entry accounting system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts. Double-Entry Accounting is based upon the following: - increase the balance in two ledger accounts - decrease the balance in two ledger accounts - increase the balance in one ledger and decreases the balance in the other ledger account - transactions with debits and credits must equal on both sides Determining Where a Debit/Credit Goes *increase with a debit, decrease with a credit *increase with a credit, decrease with a debit Asset Account Revenue Account cash sales accounts receivable interest fixed assets consulting inventory commissions Expense Account Liability Account utilities accounts payable office supplies rent payable travel and entertainment income tax payable income taxes interest payable Owner’s Equity Account common stock paid-in capital Example 1 – left side only transaction *you buy office supplies with cash *debit expense – credit cash *take away from cash (credit), you increase expense (credit) Example 2 – right side only transaction *you receive your annual general liability insurance bill *increase accounts payable – increase insurance payable *add to AP (debit); add to insurance payable (debit) Example 3 – left and right side transaction *you purchase a building with a mortgage *debit fixed asset – credit loan payable * you add a building to assets (debit), you gain a mortgage (credit) The T-Account is used often times for demonstrating how debits and credits are affected in two or more accounts. Cash (asset account) Debit Increases Credit Decreases Accounts Payable (liability account) Debit Decreases Credit Increases Paid In Capital (owners’ equity account) Debit Decreases Credit Increases Exercises 1. Name different types of assets in a business not listed above: a. _________________________________________________ b. _________________________________________________ c. _________________________________________________ d. _________________________________________________ e. _________________________________________________ 2. Name five different types of liabilities in a business not listed above: a. _________________________________________________ b. _________________________________________________ c. _________________________________________________ d. _________________________________________________ e. _________________________________________________ 3. When you receive cash, you debit/credit your bank account? Debit Credit 4. When you pay a bill, you debit/credit your accounts payable? Debit Credit 5. When you record rent expense, you will debit/credit this account? Debit Credit 6. The world “payable” will show up in an asset or liability account? Debit Credit 7. Utilities are considered an expense/liability account? Debit Credit .