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Understanding Debits, Credits, and Journal Entries

Jun 3, 2025

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.

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