Lecture Notes: Understanding Debits, Credits, and Journal Entries

Introduction

• Lecture focuses on debits, credits, and journal entries.
• Covered in Learning Objectives 2 and 3 of the textbook.
• Builds on concepts from Chapter 1.

Basic Accounting Equation

• Equation: Assets = Liabilities + Stockholders' Equity.
• Every transaction must affect at least two accounts to maintain balance.

T-Accounts

• Definition: Resembles a 'T' with a left and right side.
• Terminology:
  • Debit = Left side.
  • Credit = Right side.
• Each account has increase/decrease sides.

Mnemonic: DEAD CLEAR

• DEAD: Debits increase Expenses, Assets, Dividends.
• CLEAR: Credits increase Liabilities, Equity, Accumulated Depreciation, Revenues, Retained Earnings.

Components of Equity

• Equity consists of:
  • Contributed Capital (e.g., Common Stock).
  • Retained Earnings.

Transaction Example: Cash and Common Stock

• Scenario: Sheena contributes $30,000 for common stock.
• Cash Account:
  • Asset, increases on the left (debit).
  • $30,000 recorded as a debit.
• Common Stock:
  • Part of equity, increases on the right (credit).
  • $30,000 also recorded as a credit.

T-Account Templates

• Templates in notes help track increase/decrease sides.
• Example Accounts:
  • Cash: Increases/decreases on the left/right.
  • Accounts Receivable: Asset, increases on left.
  • Inventory: Asset, increases on left.
  • Building: Asset, increases on left.
  • Notes Receivable: Asset, increases on left.

Liabilities

• Liabilities increase on the right.
• Accounts Payable: Indicates money owed, increases on right.
• Notes Payable: Formal borrowing, increases on right.
• Unearned Revenue: Liability despite having "Revenue" in name, increases on right.

Equity

• Stockholder's Equity composed of:
  • Common Stock: Increases on right.
  • Retained Earnings: Includes revenues, increases on right.

Expenses and Dividends

• Expenses: Decrease Equity, increase on the left side.
• Dividends: Decrease Equity, increase on the left side.

Conclusion

• Understanding which side accounts increase/decrease is crucial for accounting.
• Use the DEAD CLEAR mnemonic to remember the increase/decrease sides.

Note: These notes are based on a lecture explaining the basic concepts of debits, credits, and their applications in journal entries. Understanding these fundamentals is essential for effective bookkeeping and financial analysis.