Bookkeeping - everybody can do it | Vicky Nedelcheva | Skillshare

Bookkeeping - everybody can do it

Vicky Nedelcheva, Accountant

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23 Lessons (52m)
    • 1. Welcome

      1:11
    • 2. Bookkeeping and accounting

      1:24
    • 3. Assets, liabilities, owners' equity and accounting equation

      3:44
    • 4. Revenues, expenses and expanded accounting equation

      1:59
    • 5. Transactions

      1:42
    • 6. Accounts

      2:56
    • 7. Accounnting accrual system

      2:36
    • 8. Accounting double entry system

      3:06
    • 9. Recording transactions

      1:40
    • 10. Purchase on credit

      2:01
    • 11. Purchase on cash

      1:03
    • 12. Sale on credit

      3:35
    • 13. Sale on cash

      1:56
    • 14. Unearned revenue

      1:41
    • 15. Prepaid expenses

      1:42
    • 16. Unrecorded expenses

      3:35
    • 17. Unrecorded revenue

      2:03
    • 18. Depreciation

      2:34
    • 19. Exercise 1

      2:35
    • 20. Exercise 2

      3:27
    • 21. Exercise 3

      2:44
    • 22. Exercise 4

      1:13
    • 23. Exercise 5

      1:22
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About This Class

This course is your first big step to your bookkeeping journey. It is designed for all people who want to speak the business language.

With easy to follow animations and explanations, the course will help you to gain the gold skills that you need to do a good bookkeeping job.

In case you have already some bookkeeping knowledge, the course can be used for refreshing your bookkeeping and accountancy expertise.

You will be surprised how beneficial this course is and how many things you will learn. The secret to the success of the course is that it consists of different learning resources:  videos with theory and examples, quizzes and exercises with explanations, and printable resources.

Using all these learning forms you’ll become familiar with the main accounting terms and rules of recording the most common business transactions.

Transcripts

1. Welcome: This course is your first big step to your bookkeeping journey. It is designed for all people who want to speak the business language with easy to follow animations and explanations. The course will help you to gain the gold skills that you need to do a good bookkeeping job. In case you have already some bookkeeping knowledge. The course can be used for refreshing your bookkeeping and Accountancy expertise. You will be surprised how beneficial this courses and how many things you will learn. The secret to the success of the course is the combination of different learning resources. The course provides you with theory and those quizzes and exercises and printable resources. After watching all videos and doing all quizzes and exercises, you will become familiar with the main accounting terms and rules of recording the most common business transactions. Don't hesitate and enroll in this easy to follow basic bookkeeping course. 2. Bookkeeping and accounting: Every business puts its resources into action to generate a profit. As a result, different events that have financial effects on the business happen. Accounting records, all of these events, analyze and summarize them. After that, internal and external parties can use this information for decision-making. Bookkeeping is a part of accounting that records all information related to the financial events that happened within a business. Typical transactions that happen within each business, our sales and purchases. Purchases lead to more materials, but less cash. Sales lead to few goods and more cash. Having this information, the business can make different decisions related to suppliers and clients. As I have already mentioned, bookkeeping is the part of accounting that includes only the process of recording all transactions within a business. Accounting is a wider term and includes the bookkeeping process and the process of preparation of all financial statements. Something more. Bookkeeping can be done by everyone who understands its basics. But the preparation of financial statements requires an accounting degree. 3. Assets, liabilities, owners' equity and accounting equation: Every business has five very important objects. Assets, Liabilities, Owner's equity, expenses, and revenues. Now we are going to talk about the first three objects. Assets are all resources that are owned or controlled by the business. The business uses these resources to operate its activities, expecting some future benefit. Without these resources, the business would not exist and generate a profit. Assets that the business intends to keep for less than 12 months are called current assets. Current assets are inventory, cash, and accounts receivable. Non-current assets are items that the business intends to keep for more than 12 months. Plant, machinery, buildings, and land are good examples of non-current assets. The assets can be tangible and intangible. Tangible assets are all current and non-current assets that have physical substance and can be touched. In contrast, intangible assets have no physical substance. Trademarks and patents are such assets. The assets can be funded by creditors or by owners. The amount of all assets funded by third parties is an obligation for the business and known as liabilities. Typical liabilities are a bank loan and accounts payable. The amount of the assets funded by the owners is known as owner's equity. Owners equity consists of paid-in capital and retained earnings. Paid-in-capital shows all investments by owners and retained earnings show the profit. The relationship between assets, liabilities, and owner's equity is expressed through an accounting equation. The main idea of the equation is that the total amount of all assets should be equal to the sum of the amount owed to third parties and the amount invested by the owners. Every business needs to understand the idea of Accounting Equation because it gives a clear picture of every business's financial situation. If the value of owners equity is higher than the value of liabilities, this means that the business is in a very good financial position because more of the assets are acquired by business funds rather than by debt. On the other side, if the value of liabilities is higher than the value of owners equity, This means that the business is in a bad financial position because more of the assets are acquired by debt rather than by capital. This is a typical situation for companies that start out. To understand the idea behind the accounting equation, I would like to give you the following illustration. Imagine that a business owns machines, office equipment, inventory, and money in the bank account. The total value of all of these items is $200 thousand. The business has bought its machines and office equipment with a bank loan of $120 thousand. The inventory and the money in the bank account are provided by the owners. The amount of liabilities in this case is $120 thousand and the value of the owner's equity is $80 thousand. 4. Revenues, expenses and expanded accounting equation: Operating its activities, every business occurs expenses, and generates revenues. When a business produces goods to be sold or prepares services to be delivered, it decreases its assets. In this case, the business makes payments to suppliers or expects to make payments to suppliers. This decrease in assets leads to a decrease in owner's equity Called Expense. Typical examples of expenses are rent expenses, insurance expenses, electricity expenses, wages, expenses, and so on. When a business sells goods or deliver services, it increases its assets. In this case, the business gets payments by customers or expects to get payments by customers. This increase in assets leads to an increase in owner's equity called revenue. When revenues are more than expenses, additional owners equity is generated. We call this additional owners equity retained earnings. Again, I would like to give you a simple illustration. Imagine that a business produces wooden toys. To produce its products, the business pays wages of $15 thousand. It buys wood material with a price of $24 thousand and pays $8 thousand for electricity. All these payments lead to a $47 thousand cash decrease and a $47 thousand decrease in the owners equity in the form of expenses. The business sells its wood toys for a total price of $72 thousand cash. This positive money flow leads to a $72 thousand increase in the owners equity in the form of revenues. 5. Transactions: Let's see some business events and how they affect the accounting equation. After that, we can make a conclusion about what a transaction is. A business acquires inventory for $3 thousand cash. This event increases inventory and decreases cash both by $3 thousand. The form of the assets changes, but the total amount of assets is unchanged. A business makes a payment of $100 to one of its creditors. This event decreases both assets and liabilities by 1, $1000. It decreases an asset called cash by $1000 and decreases a liability called accounts payable by $100 to a business borrows alone of $15 thousand from a bank. This event increases both assets and liabilities by $15 thousand. An asset called cash increases by $15 thousand, and a liability called notes payable increases by $15 thousand. All these events have two things in common. The first one is that they all affect the financial position of the business. And the second one is that all of them can be reliably recorded in money terms. Consequently, all these events are transactions. 6. Accounts: An account is a tool for transaction recording. It shows all changes in a particular asset, liability or owners equity element, expense or revenue, which changes are caused by transactions. Every account has a left side called debit and a right side called credit. To make correct records on accounts, we should follow and apply some rules. Rule number one, when an asset account increases, this increase should be placed on the left side of the account. Rule number two, when an expense account increases, this increase should be placed on the left side of the account. Rule number three, when an asset account decreases, this decrease should be placed on the right side of the account. Rule number four. When an expense account decreases, this decrease should be placed on the right side of the account. Rule number five. When a liability account increases, this increase should be placed on the right side of the account. Rule number six, when an owner's equity account increases, this increase should be placed on the right side of the account. Rule number seven. When a revenue account increases, this increase should be placed on the right side of the account. Rule number eight, when a liability account decreases, this decrease should be placed on the left side of the account. Rule number nine, when an owner's equity account decreases, this decrease should be placed on the left side of the account. Rule number ten. When a revenue account decreases, this decrease should be placed on the left side of the account. Let's see some simple examples. A business buys office equipment for a price of $2800. Office equipment is an asset. It is obvious that this asset increases. This means that the sum of $2800 should be recorded on the left side of the account office equipment. The business pays the sum of $2800 from its bank account. A bank account is an asset. When money goes out, the bank account decreases. This means that the sum of $2800 should be recorded on the right side of the account bank account. 7. Accounnting accrual system: There are two accounting systems, a cash accounting system and an accrual accounting system. The cash accounting system recognizes expenses and revenues only when a payment is made or received. Consequently, every money inflow is revenue and every money outflow is an expense. Most businesses apply the accrual accounting system. It allows a business to recognize revenues and expenses when they are incurred, no matter when a payment is received or made. For example, a business buys materials for $7,200 in October 20-20 and directly put all of them into the production process. The bill will be paid in January 2021. The business must recognize the cost of the materials as an expense in 2020, no matter that the cash outflow will happen in 2021. In this case, the business makes a material purchase on credit. The sum of $7,200 will appear on the material expenses account and on the accounts payable account. When a business purchases inventory on credit and directly transfers them into goods, the material expense account should be debited and the accounts payable account should be credited. This credit record expresses an obligation when the business makes the payment to its vendor, the accounts payable account should be debited. This debit record expresses a decrease in business obligations. A business sells goods for $14 thousand in November 2020 and the client will pay in January 2021. The business must recognize the total selling prices revenue in 2020, no matter that the business will receive the money next year. In this case, the business makes a sale on credit. The sum of $14 thousand will appear on the sales revenue account and on the accounts receivable account. When the business sales on credit, the accounts receivable should be debited and the sales revenue accounts should be credited. This debit record on the accounts receivable account shows that the business expects a cash inflow. When the business receives the payment from its customers, accounts receivable should be credited. This credit record shows that the expected cash inflow is already received. 8. Accounting double entry system: A double entry accounting system means that every transaction affects at least two accounts. One or more accounts should be debited and one or more should be credited. When a transaction affects only two accounts, a simple entry should be made. And when a transaction affects more than two accounts, a compound entry should be made. Let's see how these two types of entry look like as we follow three main steps. First, we will analyze which accounts change and what type these accounts are. After that, we will see how these accounts change. Using the rules of debit credit language, we will make records on the affected accounts. Here is the first example. A business buys equipment of $5 thousand on credit. This transaction affects two accounts, equipment account and accounts payable. The accountant should make a simple entry. Equipment account is an asset account that increases and accounts payable is a liability account that increases to following the rules of debit credit language, the accountant should make a debit record on the equipment account and credit record on the accounts payable. The accounting software transfers these amounts to the particular accounts in general ledger. The second example is the following. A business buys computers for $8 thousand, it should pay 50% immediately and the rest 50% later. The cash balance at this point in time is $18 thousand. This transaction affects three accounts, office equipment account, cash account, and accounts payable account. The accountant should make a compound entry. The Office Equipment account is an asset account that increases. The cash account is an asset account that decreases. And accounts payable is a liability account that increases. Following the rules of debit credit language, the accountant should make a debit record on the Office Equipment account and a credit record on the cash account and accounts payable account. The accounting software transfers these amounts to the particular accounts in general ledger. 9. Recording transactions: The first step of the process of recording transactions is receiving or creating an appropriate document. This document is evidence of what happened. Such evidence can be invoices, bills, receipts, checks, credit notes, debit notes, vouchers, orders, and so on. All these documents verify the accuracy of recorded transactions during the period. The second step is recording all transactions in chronological order. Such chronological records happen in a book called journal. A journal is a chronological list of all transactions and all affected accounts. When a business looks at the journal, it sees what transactions happened on a particular date, which accounts are affected and how they are affected. Please pay attention that all the following steps are being made automatically by the accounting software. The third step in the recording process is posting amounts from the journal to the appropriate accounts in the general ledger. The fourth step is preparing a trial balance. The trial balance is a list of all accounts of the business and shows their balances at the end of a current period. The trial balance is a base of preparation of all financial statements. And the preparation of the financial statements is the last step of the process of recording transactions. 10. Purchase on credit: Let's assume that a business acquires inventory on credit. The invoice amount that the business should pay later is $5 thousand. This transaction affects two accounts, one asset account and one liability account. The asset account inventory increases by $5 thousand and it should be debited. The liability account accounts payable increases too, and it should be credited by $5,000.1 month later the business pays to the supplier 20% of the total amount of the purchase. This transaction affects one asset account and one liability account. The effected asset account is cash account and it decreases. That's why it should be credited by 1 $1000. The effected liability account is Accounts Payable and it decreases to this account should be debited by 1 $1000. The accounting software automatically posts all these journal entries into general ledger. In the beginning, the business makes a record of $5 thousand on the debit side of the inventory account and $5 thousand on the credit side of accounts payable. The first record shows that the business increases its inventory by $5 thousand. And the second record means that the business has an obligation of $5 thousand to the supplier. After that, the business makes a record of $100 on the credit side of account cash, which means that money goes out. And 1 $1000 on the debit side of accounts payable, which means that the obligation to the supplier decreases by $100. 11. Purchase on cash: A business purchases inventory for $2 thousand cash. This transaction affects two asset accounts, the inventory account and the cash account. The inventory account increases by $2 thousand and it should be debited. The cash account decreases, and it should be credited by $2 thousand. Let's take a look at general ledger. The inventory account increases by $2 thousand and a record on the debit side of the account is placed. The cash account decreases by $2 thousand and a record on the credit side of the account is placed. This transaction does not change the total amount of the assets of the business. It shows only that one asset transforms into another. 12. Sale on credit: A business sells goods for $15 thousand on credit. This transaction affects one asset account and one revenue account. The effected asset account is Accounts Receivable and it increases by $15 thousand. That's why the accountant makes a debit record on it. The effected revenue account is sales revenues and it increases by $15 thousand to the accountant makes a credit record on it. The goods are worked off at a cost of $11 thousand. This transaction affects one expense account and one asset account. The effected asset account is the inventory account, and the effected expense account is the cost of goods sold account. The expense account Cost of Goods Sold increases by $11 thousand. The accounts should be debited. The asset account inventory decreases because the goods go out. The account should be credited. Actually, no matter that the business has not yet received money, Owner's equity increases with the difference between $15 thousand sales revenues and $11 thousand cost of goods sold. In one month, the business receives a payment of 10% of the total selling price of the goods sold. The cash inflow effects to asset accounts, account cash and accounts receivable. The cash account increases by one hundred five hundred dollars and a debit record on the account should be made. The accounts receivable account decreases by one hundred and five hundred dollars and a credit record on the account should be made. Let's take a close look at the general ledger. The accounts receivable account increases by $15 thousand and a record on the debit side of the account is placed. This shows that the business expects cash inflow. The sales revenue account increases by $15 thousand and a record on the credit side of the account is placed. This record shows that no matter that the business has not yet received money, the owner's equity increases by $15 thousand. The cost of goods sold account increases by $11 thousand and a record on the debit side of the account is placed. This record shows that the business recognizes $11 thousand expenses. When a revenue is accumulated, the owner's equity decreases by $11 thousand. The inventory account decreases by $11 thousand and a record on the credit side of the account is placed. This record shows that inventory goes out. The cash account increases by one hundred and five hundred dollars and a debit record is made. This record shows a money and flow. The asset account accounts receivable decreases by $1500 and a credit record is made. 13. Sale on cash: A business sells goods to its customers and immediately receives the whole amount of $6 thousand. The cash account increases by $6 thousand and the accountant makes a debit record on it. The sales revenue account increases by $6 thousand to the accountant makes a credit record on it. The cost of goods sold is $3 thousand. The accounts that are affected here are the inventory account and the cost of goods sold account. The expense account Cost of Goods Sold increases by $3 thousand. That's why the account should be debited. The asset account inventory decreases by the same amount because the goods go out. Consequently, the account should be credited. Let's look at the general ledger. The cash account increases by $6 thousand and a record on the debit side of the account is placed. The sales revenue account increases by $6 thousand and a record on the credit side of the account is placed. This record shows that the owner's equity increases by $6 thousand. The costs of goods sold account increases by $3 thousand and a record on the debit side of the account is placed. This record shows that the business recognizes $3 thousand expenses when revenues are accumulated, the inventory account decreases by $3 thousand and a record on the credit side of the account is placed. This record shows that inventory goes out. 14. Unearned revenue: Some businesses offer services or goods such as rent, insurance, magazines for which they acquire payments in advance. These businesses receive and record revenues before they have been earned. And these revenues are called unearned revenues. We can say that unearned revenues are a type of liabilities because the business is obligated to deliver services or goods. During the useful life of the services or goods, the unearned revenues are recognized and they increase the owner's equity. Let's see what the common journal entries related to unearned revenues are. A business receives cash of $12 thousand as an advanced rental for office space and equipment, which will be used for 12 months. This transaction affects the cash account and the unearned revenue account. The cash account is an asset account that increases and the business should place a debit record on it. The unearned revenues account is a revenue account that increases too, and the business should place a credit record on it. The useful life of the rent is 12 months. This means that every month the business should recognize part of the unearned revenues as rent revenue, which affects the owner's equity. This transaction is called adjustment. Every month the unearned revenue account should be debited by 1 $1000, and the rent revenue account should be credited by 1 $1000. 15. Prepaid expenses: Some businesses make payments in advance for services or goods such as rent, insurance, and magazines. These businesses record expenses before some benefits have been received. These expenses are called prepaid expenses. The prepaid expenses are some type of assets because the business expects to receive some benefit in the form of a service or goods. During the useful life of the services or goods, the prepaid expenses are spread to a particular expense account and they decrease the owner's equity. Let's see what the common journal entries related to prepaid expenses are. A business makes a payment of $12 thousand as an advanced rental for office space and equipment which will be used for 12 months. This transaction affects the cash account and the prepaid expenses account. The prepaid expense account is an asset account that increases and the business should place a debit record on it. The cash account is an asset account that decreases and the business should place a credit record on it. The useful life of the rent is 12 months. That's why every month the business should recognize part of the prepaid expenses as a rent expense that affects the owner's equity. This transaction is called adjustment. Every month, the rent expenses account should be debited by 1 $1000, and the prepaid expenses account should be credited by 1 $1000. 16. Unrecorded expenses: As we already know, all expenses are recorded for the period in which they are incurred, no matter when the money goes out. To accrue and expense means to record the expense for the period in which it is incurred and affects the owner's equity. Unrecorded expenses are expenses incurred in the current period but paid later. Wages earned in the current month but paid in the next month are a good example. Another appropriate examples are interests paid on borrowed money and utilities expenses. The unrecorded expenses are recorded in the period in which they are incurred. They decrease the owner's equity for the same period and lead to liabilities increase for this period. The liabilities decrease when the business pays its obligations to its employees, financial organizations, and all other suppliers. At the same time, it's assets decrease to. To understand this principle better, we'll look at two examples. Example one, a company pays its employees in the current months for the previous month. In January, the employees are in total wages of $24 thousand and they will get their wages in February. To ensure accurate financial statements for January, the company should accrue the wages earned in January at the end of this month. Said simple, the company should show that the wage expenses decrease the owners equity in January when the wages are earned, not in February when they are paid, the obligations of the company increased to Consequently, the liabilities of the company increase. Following the rules of debit credit language, the accountant should make a debit record on the wages expense account and a credit record on the accrued wages payable account. And when the company pays the wages in February, the accountant should decrease its obligation to employees and it's cache. The accrued wages payable should be debited and the cash account should be credited. Example two, in June, a company borrows a one-year loan of $30 thousand and an interest rate of 6%. Every month the company receives a benefit from this loan, but pays for the service at the end of the loan period. The expense that the company makes each month for using the bank loan is 1 12th from the whole interest. 1 12th multiplied by 6% from $30 thousand equals $150. The amount of $150 is not paid in June, but as an expense incurred in this month. That's why the accountant makes a record in June to accrue this part of the interest expense. Following the rules of debit credit language, the accountant should make a debit record on interest expense account and a credit record on the accrued payable account. And this record should be made every month. And when the company pays the whole interest at the end of the year, the accountant should decrease its obligation to the bank and its cache as well. The accrued interest payable account should be debited and the cash account should be credited. 17. Unrecorded revenue: According to the accrual basis of accounting, revenues should be recorded for the period in which they are earned, no matter when the money is received. In this way, revenues are matched with the expenses for the period in which the revenues are earned and affect the owner's equity in the same period. Unrecorded revenues, our revenues that are earned in the current period, but the money is received later. Interest revenue on a loan is exactly such unrecorded revenue. The unrecorded revenues are recorded in the period in which they are earned, increase the owner's equity for the same period and lead to assets increase for the same period. When the company receives its money, one type of asset increases and another type of asset decreases. Let's see what happens in an organization that lens $30 thousand to the company from the previous video. The total interest revenue that the organization will earn on this loan is 10000, $800. The organization receives the payment at the end of the loan period, but actually it earns $150 of these revenues every month. That's why the accountant should accrue $150 interest revenues every month and increase the assets. Following the rules of debit credit language, the following monthly records should be made. Debit record on the accrued interest receivable account and credit record on interest revenue account. This record should be made every month. And when the organization receives the whole interest after one year, the accountant should decrease its interest receivable and increase its cash. The cash account should be debited and the accrued interest receivable account should be credited. 18. Depreciation: There are some key terms related to accumulated depreciation. Let's briefly clarify what a useful life depreciation, straight line method of depreciation, reducing balance method of depreciation and accumulated depreciation account our useful life. This is the period over which one long-term asset is being used in the business. If the useful life of a long-term asset is expected to last five years, it would be sensible to reflect the fact that this long-term asset is being used in the business over five years by charging an expense each year, depreciation. And it's a process of charging the cost of a long-term asset over its useful life. Depreciation applies the matching concept by charging the cost of the asset to the income statement as it is being used up. At the same time, the value of the asset is being reduced with the amount of the cost charged. Straight line method of depreciation. Under this approach, the company charges an equal amount of depreciation each year. The depreciation charge each year is calculated as we subtract the residual value from the original value of the long-term asset. After that, we divide the result by the estimated useful life. Reducing balance method of depreciation. Under this approach, the company charges more depreciation in the early years of an asset's life with a progressively lower charge in each subsequent year. Accumulated depreciation account. This is a contra account that reduces the value of a particular long-term asset account. When a depreciation expense is recognized, this account is credited when the value of the long-term asset is decreased, this account is debited. Now we can show what records should be made when depreciation is accumulated. The first journal entry shows that an expense is recognized. The depreciation expense account is debited and the accumulated depreciation account is credited. The second journal entry shows that this expense decreases the value of a particular long-term asset. The accumulated depreciation account is debited and the particular long-term asset account is credited. 19. Exercise 1: In the following few videos, you can test your knowledge. I will give you questions with optional answers. After each question, I will give you time to think and give your answer. After that, I will share with you which one is correct? Let's start. Inventory is asset liability or owners equity. The correct answer is asset. Inventory is an item that a business uses to produce goods or to resell and get benefits in a form of revenue. Accounts payable is asset liability or owners equity? The correct answer is liability. Accounts payable show all obligations that a business hat to vendors. Owner's equity consists of assets and liabilities, paid-in capital and retained earnings, expenses, and revenues. The correct answer is paid in capital and retained earning. Assets and liabilities are elements of the accounting equation. That's why they cannot be the correct answer. Expenses and revenues only decrease or increase the retained earnings. Consequently, this answer is not correct. The expanded accounting equation consists of assets equals liabilities plus owner's equity. Assets equals liabilities plus owner's equity plus unearned revenues minus prepaid expenses. Assets equals liabilities plus owner's equity plus revenues minus expenses. The expanded accounting equation shows all revenues and expenses that affect the owner's equity. That's why the correct answer is assets equals liabilities plus owner's equity plus revenues minus expenses. The first answer shows the traditional accounting equation. The second answer is not correct because the unearned revenues and the prepaid expenses are not still incurred and they do not affect the owner's equity. 20. Exercise 2: What does double entry mean? Every transaction affects at least two accounts. Every transaction should be recorded in the journal and in the general ledger. Every transaction leads to an increase in one account and a decrease in another account? The correct answer is every transaction affects at least two accounts. This is the most essential rule of the double entry accounting system. One account should be debited and another one should be credited. The other two answers are consequences of this main rule. What records should be made when an asset account increases? A debit records should be made on the account. A credit record should be made on the account. The correct answer is a debit records should be made on the account. All increases on an asset account should be shown on the left side called debit. What records should be made when a liability account increases? A debit records should be made on the account. A credit record should be made on the account. The correct answer is a credit records should be made on the account. All increases on a liability account appear on the right side called credit. What records should be made when an asset account decreases? A debit records should be made on the account. A credit record should be made on the account. The correct answer is a credit record should be made on the account. All decreases on an asset account appear on the right side called credit. What records should be made when a liability account decreases? A debit records should be made on the account. A credit record should be made on the account. The correct answer is a debit records should be made on the account. All decreases on a liability accounts should be shown on the left side of the account. Which account has a debit balance? Sales revenue, accounts payable, accounts receivable. The correct answer is accounts receivable. This account is an asset account and all asset accounts have a debit balance. Which account has a credit balance? Accounts receivable? Accounts payable, cash. The correct answer is accounts payable. This account is a liability account, and all liability accounts have a credit balance. 21. Exercise 3: Which accounts should be debited and which should be credited for each of the following transactions. Purchased new equipment for cash, goods sold on credit, prepaid two-year rent. The first transaction affects two asset accounts. The first one is the equipment account, and the second one is the cash account. The equipment account increases and this asset account should be debited. The cash account decreases, and this asset account should be credited. The second transaction consists of more than one records. The first record shows that the business expects payment by its customer and at the same time shows this payment is revenue. The affected accounts are the accounts receivable account and the sales revenue account. Both accounts increase. The accounts receivable should be debited because it is an asset account that increases. The sales revenue account should be credited because it is a revenue account that increases. The second record shows that the goods decrease at a cost equal to all expenses related to the goods. The affected accounts are the cost of goods sold account and the inventory account. The cost of goods sold account is an expense account that shows the cost of the goods sold. It should be debited. The inventory account is an asset account that decreases. It should be credited. The third record shows what the financial result from the sale is. It compares all expenses related to the goods sold and the sale revenue. The two effected accounts are the sales revenue account and the cost of goods sold account. We say that we work off both accounts and the following records should be made. The sales revenue account is debited and the cost of goods sold account is credited. The difference between these two accounts is the financial results of the sale transaction. In most cases, the revenue is higher than the cost of goods sold and the difference increases the retained earning. The third transaction shows that a business has made a payment in advance. This prepayment affects the prepaid expenses account and the cash account. The prepaid expenses account is an expense account that increases. Consequently, it should be debited. The cash account is an asset account that decreases. Consequently, it should be credited. 22. Exercise 4: What journal entry should be made for each of the following transactions? Acquired inventory on credit, wages paid in cash, received payment in advance in exchange for one-year insurance. The first transaction expresses an increase in the inventory account and a decrease in the cash account. Both accounts are asset accounts. Therefore, we debit the inventory account and credit the cash account. The next transaction changes the wages payable account and the cash account. The wage payable account is a liability account and it decreases. That's why we debit this account. The cash account is an asset account and it decreases. Consequently, we credit this account. The third transaction increases both the cash account and the unearned revenues account. The cash account is debited and the unearned revenues account is credited. 23. Exercise 5: What journal entry should be made for each of the following transactions? Collection of accounts receivable, recognition of rent expense for the current month, paid amount on accounts payable. The first transaction expresses an increase in the cash account and a decrease in the accounts receivable account. Both accounts are asset accounts. That's why we make a debit record on the cash account and a credit record on the accounts receivable account. The next transaction shows that part of the prepaid expenses should be transferred into current expenses to expenses account are affected. The rent expense account shows an increase in the current expenses and it should be debited. The prepaid rent expense account decreases and it should be credited. The last transaction decreases two accounts, the accounts payable account and the cash account. The accounts payable account is a liability account and we make a debit record on it. The cash account is an asset account and we make a credit record on it.