In this video I’m going to take you
through five practice questions on Debits and Credits
that will help prepare you for ANYTHING! [Music] Hey viewers,
Welcome to Accounting Stuff. I’m James and today
we’re gonna dive right into some Debit and Credit
practice problems. I floated the idea of doing this kind of thing
a couple of weeks ago and you guys seemed keen
so here we go. We’re going to cover five
Debit and Credit examples and I’m going to show you
my thought process that I used to solve each one.
The technique that I’m about to show you helped me pass my accounting exams
way back when so I hope you find this a
useful tool to add to your Accounting arsenal.
These questions are going to get progressively more difficult
so don’t forget to stick around until the end.
One last thing before we get stuck in… for these questions we are going to assume
the Accrual Basis of Accounting. If you don’t know what that means
have no fear I’ve done a video covering
it already and there should be a link to it
somewhere up here in the corner.
Let’s do this! Question 1
The owner of a Car Wash provides their company with a
one thousand dollar initial investment.
Is the entry to the company’s cash account…
A: a Debit or
B: a Credit The first thing to take note of is that
cash is an asset. That’s the “A” in DEALER.
Now what’s DEALER? Here’s a little cheat sheet that I made
to help us out with these questions. DEALER is an easy way
for us to remember the expanded accounting equation.
Dividends plus Expenses plus Assets are equal to
Liabilities plus Owner’s Equity plus Revenue.
The left-hand side of this equation are normal Debit accounts.
These increase when Debited and decrease when Credited.
On the right-hand side we have the normal Credit accounts.
These increase when Credited and decrease when Debited.
I just said that cash is the “A” in DEALER.
That makes an asset and those
increase when Debited and decrease when Credited.
In this question the initial investment causes
the company’s cash to increase. So the answer is A,
a Debit. Question number two and this follows on from the first one.
Is the entry to Owner’s Equity… a Debit
or a Credit. There are two ways we can go
about solving this. In Method 1 we use DEALER.
Owner’s Equity is the second “E” in DEALER.
So we know that it’s a normal Credit account.
That means Credits increase it and Debits decrease it.
The owner of the Car Wash has invested one thousand dollars
into the company so Owner’s Equity must have
increased by one thousand dollars. So we Credit
Owner’s Equity. Alternatively,
we could have used a second Method
that’s a bit quicker. We know that in
Double-Entry Bookkeeping there are two
equal and opposite sides to every financial transaction.
Since we’ve already Debited cash in question one
we must have to Credit Owner’s Equity
in order to keep things balanced. In question three
we’re looking at a different transaction. The Car Wash
pays a supplier two hundred dollars in cash.
Which account is Debited? Is it…
A: Accounts Payable or
B: Cash If the Car Wash is
paying a supplier in cash then that means their
cash balance has to go down because they’ve paid it over
to the supplier and their accounts payable
has to go down too because they’re reducing
the amount of money they owe to the supplier.
Accounts payable is a form of liability
that’s the “L” in DEALER which makes it a
normal Credit account. So Credits increase it
and Debits decrease it. Here we want to
decrease accounts payable so the answers “A”
We’ve got to Debit it. In question four
a customer gets their car washed for ten dollars.
They pay On Account with 30 day payment terms.
Which account is Credited? Is it…
A: Revenue B: Cash
or C: Accounts Receivable Here we can eliminate cash
right away because this transaction doesn’t involve cash.
The customer pays the Car Wash On Account
so they still owe the Car Wash ten dollars.
But they have 30 days in order to hand over the money
because they’ve got 30 day credit terms.
So we are left with Revenue
or Accounts Receivable. And this transaction
represents a sale because a service has
been provided to the customer and the
“Revenue Recognition Principle” tells us that we need to recognise
this income now because revenue is recognised
when it’s earned not when cash changes hands.
Revenue is the “R” in DEALER
so it’s a normal Credit account. So Credits increase it
and Debits decrease it. Here we need to increase revenue
so we need to Credit it. Question number five.
The following month the car wash receives the ten dollars
from the customer. Which account is Credited?
Is it… A: Revenue
B: Cash or C: Accounts Receivable
Right off the bat we can remove revenue
because this transaction doesn’t involve revenue.
We’re still applying the Revenue Recognition Principle
so the revenue was recognised back when it was earned
the previous month in question four.
So we’re left with cash and
accounts receivable. Cash is an asset
which is the “A” in DEALER
so Debits increase it and Credits decrease it.
Since the Car Wash has received cash.
Cash needs to be Debited to increase it.
That leaves us with accounts receivable.
In question four the customer owed
the Car Wash ten dollars.
So the Car Wash needed to recognise an account receivable.
Now that the Car Wash has received that ten dollars back.
That balance needs to be reduced down
to NIL. Accounts receivable
are also a form of asset so Debits increase it
and Credits decrease it. Here we want to reduce our
accounts receivable balance. So we need to Credit it.
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Subscribe if you haven’t already. How did you find
these practice questions today? Were they’re too easy?
Were they too hard? I’d love to hear your feedback.
I put out new videos every Monday
here on Accounting Stuff.
See you in the next one! [Music]