- [Instructor] You're 18 again,
and you want to work outdoors and set your own schedule.
So let's start our own landscaping business.
Next, you drive to the local lawn and garden store
and purchase a lawnmower and a gas can for $250.
Instead of paying for the mower with cash,
you open a charge account, which will allow you to pay
for the mower in 30 days with no interest charge.
Beyond this 30 day grace period
an interest charge is going to apply.
The journal entry to record this purchase shown here.
We increase our asset, equipment,
and assets as we know, are increased with debits.
We also increase our liability, accounts payable.
And we know that liabilities increase with credits.
Thus, debits equal credits.
And as a result, we know
that the accounting equation is going to balance.
The accounting equation you can see here.
Now, when you eventually pay for the mower,
cash will be reduced and the liability, accounts payable,
will also be reduced, thus keeping the equation in balance.
Now, back you go to the lawn and garden store
to purchase fertilizer, gloves, a rake, shovel
and other assorted supplies.
The total cost $180, which you pay in cash.
An increase in one asset, supplies,
results in a decrease in another asset, cash.
Again, the debits equal the credits.
The accounting equation now shows
that we have assets totaling $4,250
if we add up all the asset accounts.
Liabilities of $2,250
if we add up all the liability accounts.
And owner's equity of $2,000.
The amount of our assets exactly equals
the amount of our liabilities and owner's equity.
Perfect.
Now, on the way home from the store,
you drive past a greenhouse
and notice a big sign advertising a 50% off sale on shrubs.
Since you anticipate that planting shrubs
will be part of your business,
you stop and you purchase
for cash $150 worth of shrubs as inventory.
You plan to make money in two ways with the shrubs.
First, revenue from the labor associated with planting them.
And second, a profit on selling of shrubs
for more than you paid.
After all, that's fair.
You're saving your client the time and trouble
of having to go to the greenhouse.
The journal entry for recording
these transactions is as follows.
This journal entry recognizing
that you're again trading one asset for another.
You have less cash.
That requires a credit to the cash account.
And you have more inventory,
which being an asset, increases with a debit.
Now, the various account balances
that are part of the accounting equation
will look like this.
Our assets, if we total them up equal $4,250.
Our liabilities total $2,250.
And our owner's equity account, capital stock, is $2,000.
Our balance sheet, whew, still balances.
Now, I've been involved with accounting for almost 40 years,
and I am still amazed that the system always works.
We just need to remember the following.
Debits go on the left side of the T account.
Credits go on the right.
Assets increase with debits,
and liabilities and owner's equity accounts
increase with credits.
There's always one debit and one credit
for each transaction, for each journal entry.
And debits always equal credits.