In this video I'm going to take you through five practice questions on
Debits and Credits that will help prepare you for
ANYTHING!
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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. If you found this video useful
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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!
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