Module 1 - Accounting Equation; Debits & Credits (Video Transcript) PDF

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ACC201 Module 1: Accounting Equation; Debits & Credits (Video Transcript) https://www.youtube.com/watch? v=f7T5wVsUUQY&list=PLlUGQlFH9gA9Q313fqSAIwdJ3lBYQypGH&index=4

Hi, welcome to the presentation on the accounting equation. As you can see by our introductory slide, the accounting equation-- assets equals liabilities plus equity-- spells the word ale. And that's easy for most undergraduate students to remember.

Assets equals liability plus equity. Assets are all things that are owned by the entity. Assets are classified into current and non-current assets based on how quickly those assets can be turned into cash. Assets that can be turned into cash within one year are classified as current assets. Some examples include accounts receivable, notes receivable, trading securities, and things of that nature. Non-current assets are everything that are not current assets. So, include equipment, land. Those are tangible assets, as well as the intangible assets, trademarks, copyrights, things of that nature. Liabilities are what the company

owes to outside entities. They are expected to be paid within a year. Examples include accounts payable, notes payable, and importantly, the current portion of long-term liabilities that are being paid for over time, for instance a bank loan that requires equal payments over the term of the loan. Non-current liabilities are all liabilities that are not current liabilities. An example that is the bank loan. Equity is basically the residual. It's all what's left after you take the liabilities from the assets. We record all owners’ inputs, whether they are contributions of money or other assets, or if they're purchase of stock, in the equity portion. The equity portion also has, and account called retained earnings. And that is the accumulation of all net income minus the net loss over the entire life of the company.

Debit and credit are literally speaking in a foreign language. Debit means left in Latin. And credit means right in Latin. It does not change. Debit is always left. Credit is always right. So, when we place them over our T account, or our T for every account, we will see that debits are on the left, and credits are on the right.

Now when we apply the debits and credits to the accounting equation, we note that debit is always on the left. And credit is always on the right. However, for assets, debits are increases. And credits are decreases. For liabilities and equity, debits are decreases, and credits are increases. So, when you are working on those accounting problems, you should have a copy of this slide out in front of you. And the first thing you should determine is the accounts that I'm using, are they assets, liabilities, or equity? Once you determine that, you can then determine where the increase and the decrease go in the accounting equation. And this will make working on those problems much, much easier. Remember increase and decrease doesn't necessarily mean good or bad. It's just increases or decrease. Well that's our presentation on accounting equation. Remember a mnemonic for the accounting equation is ale. Assets equals liability plus equity. Debit is always on the left. Credit is always on the right. Whether it's an increase or a decrease depends on whether it's an asset, liability, or equity. Debits are increases for assets. Credits are decreases for assets. And debits are decreases for liabilities and equity. Credits are increases for liabilities and equity. I hope that clarifies the accounting equation and debits and credits for you. Go forth and do great in your accounting class....