Your father runs a small auto body shop. He has decided to computerize his recor

Question

Your father runs a small auto body shop. He has decided to computerize his records and has asked you to explain the basics of accounting to him so that he can enter the data into his accounting software.
•Explain to him the rules of debits and credits for the balance sheet and income statement.
•Provide examples from the manufacturing industry of:
?a journal entry that would be recorded that impacts the balance sheet.
?a journal entry that would be recorded affecting the income statement.
•Please provide the assumptions behind the transactions and the full journal entries

Explanation / Answer

Debits & Credits
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In each and evry accounting transaction, there are atleast two elements(accounts) involved. These accounts are either debited or credited, with the amount that is reflected in the transaction, depending on the nature of the account(Real/Personal/Nominal) and the rule applicable to it.

Golden universal rules of Debits & Credits
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Accounting elements are categorized into three groups viz.
Real - examples are cash, equipments, furnitures etc.
Personal - Proprietor's Capital, Accounts Payable, Accounts Receivables etc.
Nominal - All expenses & gains

Real Account
Debit what comes In
Credit what goes out

Example : Paid for equipment purchase $10,500. In this accounting transaction, Cash and Equipments accounts are involved. They belong to Real account. Now applying golden rule for real accounts we know Debit What comes in, So Equipment would be debited and Cash goes out , so Cash would be credited.

Personal Account
===============
Debit the receiver
Credit the giver

Example : Purchased raw materials(GI Sheets) for $125,125 from Sheets Supplier Company on credit. We have Raw Materials Inventory (Real Account) and Sheets Supplier Company(Personal Account). Golden Rule for Personal account Credit the giver. So entry would be :

Raw Materials(Sheets) Inventory Debit $125,125
Sheets Supplier Company Credit $125,125

Nominal Account
==============
All expenses & Losses should be Debited
All income & gains should be Credited

Example : Used Sheets for $50,100 for the repairing work In this transaction we have expense for the period and applying the golden rule, We need to debit Work In Progress(expense account for raw materials usage viz. all expenses should be debited) as follows :

Work In Process Debit $50,100
Raw Materials(Sheets) Inventory Credit $50,100

a. a journal entry that would be recorded that impacts the balance sheet.

Equipment $10,500 (Assests on Balance Sheet)
Cash $10,500 (Assests on Balance Sheet)

b. a journal entry that would be recorded affecting the income statement.
Provide the assumptions behind the transactions and the full journal entries.

Manufacturing Wages $100,525 (Affecting income statement -)
Wages Payable $100,525

Accounts Receivables $250,620
Sales Revenue $250,620 (Affecting income statement +)

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