Super Sample Accounting Transactions
We learn by example, and that is what this tutorial is all about! Use this tutorial as a guide the next time you have bookkeeping transactions or journal entries to enter into Intuit Quickbooks, Sage Peachtree, or another accounting software program. We'll look at examples of transactions and journal entries common to most businesses, and also learn why we debit and credit the accounts that we do.
When recording an Accounting transaction or journal entry, one account is debited and another account is credited. In some cases, two accounts may receive the debit or credit. But the total amount of the debit must equal the total amount of the credit.
For many transactions, such as writing a check, the Accounting software automatically chooses one of the accounts (Cash, for instance) and the user must choose only one account. When posting journal entries however, the user must select both the account to debit and the account to credit.
PS: If you're new to Accounting or Bookkeeping, or just don't "get it," you'll like our popular tutorial Accounting: Making Sense of Debits and Credits. We use simple math to explain debits and credits using the number line shown below. Check it out!
In the examples below, QBP (QuickBooks Pro) is often used when referring to the Accounting software program as it is the program we are most familiar with. But regardless of the program you use, the accounts to debit and credit are the same. Let's begin!
Example 1: Owner invests $5,000 in the company. Analysis: Since money is deposited into the checking account, Cash is debited (the balance increased by $5,000). What account receives a credit? An Equity account called Owner’s Equity or Capital Contribution. Since Equity accounts are ‘negative’ accounts, crediting this Equity account increases its balance by $5,000.
Debit Cash (increase its balance)
Credit Owner’s Equity (increases its balance)
Example 2: The Company borrowed $8,000 from a bank. Analysis: Since the money will be deposited into the checking account, Cash is debited (the balance increased by $8,000.) The account to receive the credit is a Liability account called Loans Payable (you may create a separate account or subaccount for each loan). Liability accounts are credit accounts, so crediting the Liability account increases its negative balance by $8,000 (move to the left on the number line).
Debit Cash (increases its balance)
Credit Loans Payable (increases its balance)
Example 3: Your bank charges you a $14 a month statement fee. Analysis: This transaction is entered via a journal entry each month when the statement fee is identified on the bank statement. Since money was removed from the checking account, Cash must be credited (the balance decreased by $14). The Expense account called Bank Service Charges will receive the debit.
Debit Bank Fees (increases its balance)
Credit Cash (decreases its balance)
Example 4: You write a check for a loan payment of $540 for the $8,000 loan you acquired in Example 2. Of this amount, $500 is being applied to the principal, and $40 is loan interest. Analysis: Since a check is being written, the Accounting software will automatically credit Cash. In this case the debit is split between two accounts. To reflect the $500 that has been applied to the loan balance, debit the loan account. (Since it is a liability account, a debit will reduce it's balance, which is what you want.) The $40 interest paid is an expense, so debit the expense account called Interest. Remember that even though the debit is split between two accounts, the total debit must always equal the total credit.
Debit Loans Payable $500 (decreases its balance)
Debit Interest Expense $40 (increases its balance)
Credit Cash $540 (decreases its balance)
Example 5: the Company wrote a check for $8,500 of equipment. Analysis: Since a check was written, QBP will automatically credit Cash. We will debit an Asset account called Equipment or something similar. Note: Remember, if you purchase an item for more than about $500, you should depreciate the item; not expense it. ($500 is a "rule of thumb," but I am not suggesting you use it.) So the Asset account receives the debit instead of an expense account. To record the depreciation, journal entries would be entered for one or more years. Always consult with your Accountant when purchasing company assets.
Debit Equipment (increases its balance)
Credit Cash (decreases its balance)
[Remember: A debit adds a positive number and a credit adds a negative number. But you NEVER put a minus sign on a number you enter into QBP.]
Example 6: the Company wrote a check for $318 of office supplies. Analysis: Since a check was written, QBP will automatically credit Cash. We debit the Expense account called Office.
Debit Office (increases its balance)
Credit Cash (decreases its balance)
Example 7: the Company purchased $318 of office supplies on credit and you entered a bill into QBP. Analysis: When you enter a bill, QBP automatically credits the Liability account called Accounts Payable. And since you purchased office supplies, the Office expense account is debited.
Debit Office (increase its balance)
Credit Accounts Payable (increases its balance)
Example 8: You paid the bill for $318 of office supplies purchased in Example 7. Analysis: When the bill was entered, Office was debited and A/P was credited. Now as we write a check to pay the bill, QBP will automatically credit Cash. And QBP will debit Accounts Payable - in effect, reversing the earlier credit.
Debit Accounts Payable (decreases its balance)
Credit Cash (decrease its balance)
Example 9: the Company paid $450 cash for Product A - a COGS part. Analysis: When you write the check, QBP will automatically credit Cash. In the check window, choose the COGS account from the Expenses tab, or choose an Item from the Items tab and then the COGS account associated with the Item will be debited.
Debit COGS (increase its balance)
Credit Cash (decrease its balance)
Example 10: the Company sold Product A for $650 cash. Analysis: When you enter the cash sale, QBP automatically debits Cash (or you could choose to deposit to Undeposited Funds - see Example 14). You will have to choose an Item for the sale … it might be “Prod A income” and associated with the Sales account.
Debit Cash (increases its balance)
Credit Sales (increases its balance)
Example 11: the Company sold Product A for $650 on credit. Analysis: When you create an invoice, you must specify an Item for each separate charge on the invoice. QBP will automatically credit the revenue account(s) associated with these Items. And QBP automatically debits the Invoice amount to A/R.
Debit Accounts Receivable (increases the balance)
Credit Sales (increases the balance)
Example 12: the Company received a payment for the $650 invoice above. Analysis: When you created the invoice, QBP automatically debited the A/R account. When you post the invoice payment, QBP will automatically credit A/R - in effect reversing the earlier debit. QBP will debit Cash.
Debit Cash (increases the balance)
Credit A/R (decreases the balance)
Example 13: The owner’s writes himself a check for $1,000. Analysis: Since a check was written, QBP will automatically credit Cash. The account you chose for the debit is and Equity account called Draw (Sole Proprietor) or Distribution (Corporation). Note: These are the only non-contra Equity accounts that are positive accounts and receive debits.
Debit Owner’s Draw (increases its balance)
Credit Cash (decrease its balance)
Example 14: the Company has many sales receipts during the day, but you would like one deposit to Cash for the entire day's sales. Scenario: You receive over 50 cash payments each day, enter each transaction into QBP, put the money/check in the cash drawer, and take the lot to the bank at day’s end. For each cash sale, you use Create Sales Receipt. For payment of an invoice, you use Receive Payments. You may also opt to enter a payment directly using Record Deposits. (Terminology may vary with different versions of QBP.)
For each transaction, you must tell QBP where to deposit the money. If you choose Cash each time, you will have over 50 transactions in your QBP check register for that day and every day! Not good. Wouldn't it be nice if you had just one deposit to Cash in QBP to mirror the actual bank deposit? This would also make balancing your checkbook easier. You can accomplish this by using the Undeposited Funds account - the “cash drawer” of QBP.
The Undeposited Funds account acts as a temporary holding place. When you enter each transaction into QBP, deposit the money to Undeposited Funds instead of Cash. THEN, at day’s end, transfer the money from Undeposited Funds to Cash. This gives you one deposit (debit) to Cash in QBP for the day as desired.
How is this done? Click Record Deposits. In the Payments to Deposit window you should see all the payments you posted to Undeposited Funds. To deposit them to Cash, click “Select All” and click OK. You will now have one deposit in your QBP check register … just like the actual deposit you will take to the bank.
Important Note: Once you have deposited to Undeposited Funds, each time you go into Record Deposits, you will first be presented with the Payments to Deposit window. If you do not want to transfer the money sitting in Undeposited Funds but want to actually make a deposit, just X out of this window and then you will be presented with the Record Deposits window.
We hope this tutorial has been helpful. Cheers!
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