Authored for ENMU Tutoring Services. By Jessica Huff

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1 By Jessica Huff

2 The standard accounting equation is Assets=Liabilities + Stockholders Equity. Depending on which item someone is looking at will determine what the normal balance is. The normal balance is simply the standard way an item is shown. Whether it is a debit or a credit In the accounting sense, debit does not always mean addition, and credit does not always mean subtraction.

3 Common short-term assets: Cash Accounts receivable Inventory Prepaid items (insurance, rent) Supplies Short-term investments Common long-term assets: Equipment Land Buildings

4 The items on the previous slide have a normal balance of a debit. A debit in this case is an increase to that side. A credit would reduce the value Assets can be thought of as an item that benefits a company to make it a debit.

5 For example: If I were to sell something to a friend for $20.00, I would debit my cash account for that amount. Then, if I went and used $5.00 for that money to buy candy, I would credit my cash account to have a remaining balance of $ Cash - = 5

6 Contra-assets are items like depreciation, amortization, depletion, and allowance for doubtful accounts that are listed on the asset side, but they take away from the value of the asset. These items are just an accountant s way of determining the value of these assets, but they do not do anything else. Liabilities are what a company owes someone else. Their normal balance is a credit. NOTE: This does not make them a liability or a part of stockholders equity.

7 For example: A building was bought at a cost of $100,000. Through depreciation methods, it is determined that the building is now worth $80,000, which means that it depreciated $20,000. Building 100,000 Accumulated Depreciation- Building 20, ,000 20,000 The building is reported to have a value of $80,000 on the financial statements, but these accounts are kept separate for recording purposes. Authored for

8 Common short-term liabilities: Accounts payable Short-term notes payable Current portion of long-term debt (long-term debt that has come due) Accrued liabilities Common long-term liabilities: Long-term debt

9 As previously mentioned, liabilities are things that a company owes someone else. Liabilities have a normal balance of a credit. Adding to the liabilities increases the credits while paying them off is recorded as a debit.

10 For example: I paid for my groceries at the store with a credit card. My total was $ My accounts payable account will now have a credit of $ At the end of the month, I could only pay off two-thirds of this balance ($200.00), leaving $ owed. Accounts Payable =

11 Stockholders Equity contains these items: Common stock Preferred stock Additional paid-in-capital Treasury stock Retained earnings Common and preferred stock are different ways someone can invest in a company. Treasury stock is stock that has been bought back by the company. Additional paid-in-capital accounts for the excess that a company has received for stock sold over its stated value. Retained earnings is money kept in the company. Authored for

12 Common Stock and Preferred Stock have a normal balance of a credit. Treasury Stock has a normal balance of a debit. When shares are bought back, Treasury Stock is debited and the Preferred or Common Stock is credited. Additional Paid-in-Capital has a normal balance of a credit. Retained Earnings consists of Net Income (Revenues Expenses) and Dividends Authored for Revenues have a normal balance of a credit. Expenses have a normal balance of a debit. Dividends have a normal balance of a debit.

13 Assume that my corporation sells someone 100 shares of common stock that have a par value of $1.00 for $3.00 a share. It also sells that person 50 shares of preferred stock with a par value of $1.00 for $5.00 a share. This par value on the stocks is a value for its shares that a company has come up with. It does not have a high value. Values: Cash Received (100*3)+(50*5)= $550 Common Stock value being bought (100*1)= $100 Preferred Stock value being bought (50*1)= $50 Authored for

14 Since the corporation is receiving money in exchange for stocks, the company will debit cash for $ For credits, common stock will be credited for $ and preferred stock for $ The debits now equal $550.00, and the credits equal $ They are unequal, so this is where additional paid-in- capital comes into play to make them equal. The journal entry will look like this: Cash 550 Common Stock 100 Preferred Stock 50 Additional Paid-in-Capital = 550

15 The T-Accounts will look like this 550 Cash Common Stock Preferred Stock 50 Additional Paid-in-Capital 400 Authored for

16 Expenses (depreciation, utilities, salaries, interest, and supplies, etc.) are a debit because the item will be credited to reduce what the company has. Supplies Expense Supplies Dividends are a debit because cash will be credited to pay them out. Dividends Paid Cash

17 Revenues are credited because cash or accounts receivable will be debited. Cash Revenues There are also unearned revenues, which are revenues for the company that have not been earned. Cash has been received though. Cash Unearned Revenues When unearned revenues are earned, the journal entry will be: Unearned Revenues Revenues

18 ing or crediting an account does not necessarily increase or decrease the value. Accounts have different normal balances. Learning the normal balances will take time, and cannot be learned overnight. Doing the problems will help learn the balances. When looking at debiting or crediting an account, think about the transaction taking place. There will always be a debit and always a credit. Authored for

2-8. Identify whether each of the following items increases or decreases cash flow:

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