Bookkeeping (Word Scrambles with Coaching)

Debits are entries made on the left side of a general ledger account. Debits increase the normal debit balances in the asset and expense accounts and decrease the normal credit balances in the liability, equity, and revenue accounts. In double-entry bookkeeping, each transaction must have the total of the debit amounts equal to the total of the credit amounts.

Example: Assume a company sells a product and receives $500 cash. The company will debit the Cash account to increase the asset and credit the Sales Revenues account to increase its credit balance.

Credits are entries made on the right side of a general ledger account. Credits increase the normal credit balances in the liability, equity, and revenue accounts, and decrease the normal debit balances of the asset and expense accounts. Each transaction must have the total of the credit amounts equal to the total of the debit amounts.

Example: Assume a company received a repair bill for $300 that is due in 10 days. The company will credit Accounts Payable, increasing the liability account balance, and debit Repairs Expense.

Liabilities are obligations the company must pay in the future. Liabilities are reported on the balance sheet and these accounts normally have credit balances. Liabilities include loans, accounts payable, and other forms of debt.

Example: A company owes $1,000 to a supplier, which is recorded as a credit to Accounts Payable and increases the company’s liabilities.

Assets are resources owned by a company that provide future economic benefits and typically the asset accounts have debit balances. Examples include cash, accounts receivable, and equipment.

Example: When a company buys a $2,000 piece of equipment, it will debit the Equipment account, increasing the account’s balance that will be reported on the balance sheet.

Operating revenues are the amounts earned from a company’s core or main business operations. They cause an increase in the company’s equity.

Example: A service company earns $5,000 for services rendered, which will be credited to the Service Revenues account. This in turn increases the company’s equity.

The general ledger is a collection of accounts in which transactions are recorded. It includes details of debits and credits and is used to prepare the company’s financial statements.

Example: A $300 sale on credit will result in a $300 credit to the general ledger account Sales, and a $300 debit to the account Accounts Receivable.

The general journal is a chronological list of transactions before they are posted to ledger accounts.

Example: Adjusting entries are examples of items recorded in the general journal prior to being posted to the general ledger accounts. In addition to depreciation, the adjusting entries for accruals and deferrals are recorded in the general journal.

Accumulated depreciation is the cumulative amount of depreciation that has been recorded for a plant asset since its acquisition. It is a contra-asset account and reduces the book or carrying value of long-term tangible assets on the balance sheet.

Example: A $10,000 machine being depreciated at $1,000 per year for three years will have a credit balance of $3,000 in Accumulated Depreciation. At that point, the machine will have a book value of $7,000.

Double-entry bookkeeping (or accounting) is a system where every financial transaction affects at least two accounts. One or more accounts will be debited, and one or more accounts will be credited. This system also ensures that the accounting equation remains in balance.

Example: When a company buys inventory having a cost of $500 on credit, it will debit Inventory (or Purchases) and credit Accounts Payable for $500.

The accounting equation is Assets = Liabilities + Equity (or Owner’s Equity or Stockholders’ Equity). The accounting equation must remain in balance.

Example: If a company has $20,000 in assets and $5,000 in liabilities, its owner’s (or stockholders’) equity must be $15,000.

Accounts payable reports the amounts a company owes to its creditors for goods or services received but not yet paid. Accounts payable, wages payable, and notes payable are a few examples of liabilities and liability accounts.

Example: If a company receives an invoice for $700 for office supplies it purchased on credit, it records the amount as a credit entry in Accounts Payable. When the supplier is paid, Accounts Payable will be debited.

The aging of accounts receivable sorts a company’s accounts receivables by the length of time they have been outstanding. This helps businesses manage collections and quickly see which customers are not paying as agreed.

Example: An aging report might show that $40,000 of the receivables are not yet due, $1,500 of receivables are 1 to 30 days past due, while $500 are more than 60 days past due.

Expenses are the costs incurred by a business to generate revenues. Common examples of expenses include rent, salaries, and utilities. They decrease equity but are first recorded as debits in the expense accounts.

Example: When a corporation pays $300 for utilities, it records a debit in the Utilities Expense account. This in turn reduces the corporation’s stockholders’ equity.

A deferral involves postponing the recognition of revenue or expense. Deferred revenue is recorded when payment is received before the company has earned it. Deferred expenses are prepaid costs that will become expenses in future periods.

Example: If a company receives $1,200 in advance for a 12-month service contract, it records $1,200 in the liability account Deferred Revenues. As the amount is earned, it is moved from Deferred Revenues to a revenue account (an income statement account). If a company pays $6,000 for insurance premiums for the 6-months beginning in the following month, the $6,000 will be recorded in the current asset account Prepaid insurance.

A liability account is increased when an expense is incurred but not paid. Common descriptions include accrued interest payable, accrued payroll expenses, accrued utilities.

Example: A bank loan may require interest of 10% per year, but the interest is to be paid only quarterly. Therefore, on almost every day during the loan there is some interest owed. The amount owed is the credit balance in Accrued Interest owed.

Separation of duties is an internal control principle that divides responsibilities among different individuals to reduce the risk of error or fraud. The risk is reduced because no one person has control over all aspects of a financial transaction.

Example: In a company, one employee might authorize purchases, another processes payments, and a third reconciles bank statements, ensuring a system of checks and balances. This process requires all three people to be dishonest in order to steal the company’s money.

A deposit is an amount added to a company’s bank account in the bank reconciliation. It can also refer to the cash or checks received but not yet appearing in the bank account.

Example: Assume a business deposits $1,000 into its bank account after banking hours. The company’s Cash account includes the $1,000. However, the bank statement will not show the deposit until the next business day.

A vendor is a person or company that supplies goods or services to another business. Transactions with vendors (or suppliers) typically involve accounts payable when the goods or services are received on credit.

Example: A company purchasing $500 worth of inventory from a vendor (or supplier) will credit Accounts Payable and debit Inventory (or Purchases), reflecting the obligation to pay the vendor.

A creditor is an entity or person to which a company owes money. Creditors can include banks, suppliers, and others that have extended credit to the company.

Example: If a business borrows $2,000 from a bank, the bank is the creditor, and the amount owed is reported by the business as a liability under Loans Payable.

Prepaid expenses (including prepaid insurance) are payments made in advance for goods or services to be received in the future. They are initially recorded as assets and then expensed over future perioids.

Example: A company paying $1,200 for a year’s insurance in advance will record the $1,200 in the asset account, Prepaid Insurance. Each month, the company will remove $100 from Prepaid Insurance and will report it as Insurance Expense.