Question

Case Scenario: Felix is taking a financial accounting class for the first time and he is having a difficult time understanding it. Felix comes to you for help because he really wants to pass his class with a good grade! In your response, please tell Felix how he would use Debits and Credits to track 2 different transactions in the accounting records. You may choose any 2 business transactions, and you must discuss how each transaction is fully entered in the journal. For full credit, please also explain how Each transaction impacts the accounting equation (ex: do assets, liabilities, and/or stockholders' equity increase or decrease in each transaction?).

Answer 1

For answering the above case scenario, we first need to understand the 2 basic and fundamental and probably the 2 most important concepts of accounting or double entry system : 1) 3 Golden rules of accounting 2) Accounting equation

1) 3 Golden Rules of Accounting : These rules revolve around what should be credited and what should be debited. Double entry system is based on the concept that all debits should be equal to all credits. These 3 golden rules are as follows :

-> Debit what comes in, credit what goes out

-> Debit all expenses and losses, Credit all incomes and gains

-> Debit the receiver, Credit the giver.

All journal entries are based on the above 3 golden rules.

2) Accounting Equation : This is a rather simple concept. If you have seen a Balance sheet, you would understand that Total assets are always equal to total of liabilities and equity. Accounting equation is as follows :

Total Assets = Total Liabilities + Total Equity (Total debits = Total credits)

Any journal entry being posted has to balance out the above equation. Also by nature, assets are "Debit balances" and liabilities and equity are "Credit Balances".

Now that we have understood the above 2 important concepts, we can take following 2 examples to elaborate further :

Example #1 : Paid 1000 $ for electricity expense.

Journal entry and impact on accounting equation is as follows :

S. No.	Particulars	Dr. ($)	Cr. ($)	Why Debited/Credited	Impact on Accounting Equation
1	Electricity Expense ..Dr	1000		Debit all expenses : Electricity expense incurred hence debited	Decreases Equity (As expense reduces profit)
	To Cash a/c		1000	Credit what goes out : Cash is going out hence credited	Decreases Assets

Example #2: Sold goods for 1000 $ and received cash.

Journal entry and impact on accounting equation is as follows :

S. No.	Particulars	Dr. ($)	Cr. ($)	Why Debited/Credited	Impact on Accounting Equation
2	Cash a/c …Dr	1000		Debit what comes in : We have received cash, hence debited	Increases Assets
	To Sales a/c		1000	Credit all incomes and gains : Sales is an income/revenue for us, hence credited	Increases Shareholders Equity (Increases profit)