Read Along With the VideoTranscript
Okay, I promised you some shortcuts to normal. So what we're trying to figure out is if we have an account, cash, how do we know that cash is a debit account? How do we know that increases go on this side and decreases go on this side? Well, if you look at some of the other videos, we've done this a ton of times. Assets equals liability plus owner's equity. Assets are on the left side. These two guys are on the right side. Cash is an asset, so it's on the left side. Increases go on the left side because assets live on the left side. We also decided owner's equity is contributed capital and retained earnings.
So those are both pretty easy to figure out. They're normal credit accounts because they live on the credit side of the equation. But retained earnings is revenues, it's expenses, and it's dividends. And so we worked our way through all of these. We said an increase in revenue is an increase in retained earnings, is an increase in owner's equity. Therefore, revenue and owner's equity are the same. They're both credit accounts. And then we worked our way through expenses. If expenses go up, retained earnings goes down, owner's equity goes down, so it must be the opposite.
We said that it makes sense that those two are opposite, and dividends goes up, retained earnings goes down, owner's equity goes down, so it must be the opposite of owner's equity also. Okay, so we've worked through all of this stuff already. Now, I promised you some shortcuts because you may forget all of that, and it's better to know a couple of different ways to do it than just one. Before we do that, let's talk about double entry accounting. Double entry accounting was actually invented, if you can believe that, in 1491, I think, in Italy. A guy invented double entry accounting. Not a lot to do back then.
What double entry accounting says is that there are two entries for one event. So if you sell something for, let's say you make a sale for $1,000, that's one event. That's one thing that happened. You made a sale. It was for $1,000. But you increased cash, and you also increased revenue. So you have two entries. Likewise, you bought land.
Let's say you bought land for $100,000. Well, you paid cash for it because I said with cash. You paid cash, so your cash went down. But your land account went up. So again, you have two entries. Okay. Another thing that we remember is equations have to balance. You can put one on this side, but you gotta put one on this side. You can put one on this side, but you gotta take away one from that side. So those things balance. So every event that happens has two entries, and those entries have to balance, right? 'Cause you can't just adjust one side of the equation and then move on because that doesn't balance.
That doesn't work. So you either have to do the same thing to the other side or the opposite to the same side. So we know that one event is going to lead to two entries because of double entry. We know that those two entries must balance.
And so if we know one of the entries, and we know that it must balance, then we can figure out the other entry. So if I said you bought land, this is the same one we just looked at, bought land for $100,000 cash. And the question says, "Show that in T-accounts."
So what happens to the T-accounts? Okay, well, first we gotta figure out what accounts we're dealing with. Looks like probably cash and probably land. So just to pretend, let's say you know cash, but you don't know land. You think on the test, "Crap, I have no idea which side is the normal side for land. How do I increase the land account?" So you think, "Well, I'm in trouble." But you know cash. You know cash because cash is one that you deal with all the time, and you just for some reason remember that one. So you know cash went down.
Cash went down, and you know that land went up, but we don't really remember how to do that. We know how to do this one. Cash goes down. You put it on the right side. So we've made cash go down. Now how do we make land go up? Well, really, it doesn't matter. If you look at the entry so far, so far we've got $100,000 in credits. So we need $100,000 in debits 'cause remember, it has to balance. So we have to put land over here.
Simply because you have to have the same amount of debits and the same amount of credits. So if you don't know one, let's say you don't know land, work with the one that you know, and then do the opposite on the one that you don't know, 'cause you know that it must balance. You can't put $100,000 over here because then you end up with $200,000 on the credit side of this transaction. For these two events, you've got $200,000 in credits and zero in debits anywhere, and so you know, well, that can't be right. So if you're gonna guess, guess intelligently and put it on the opposite side as the one you know.
Let's say you forget revenue. You made a sale for 500 bucks cash. They actually paid you up front. So here's cash again. Cash is great. Nobody ever forgets cash. Cash always goes on this side. The other one is we made a sale, which tips you off that you're really looking at revenue here. Revenue, you just completely forgot. You didn't study enough. You have no idea what revenue is. Well, you got 500 debits. Let's just go ahead and throw it in, 500 credit. Boom. Then you've got debit 500, credit 500. Move on. It balances. Here's another one.
You forget dividends. Dividends is an easy one to forget because you don't deal with it a whole lot. Dividends, so company paid $1,000 dividends. Okay? Paid is cash. We're dealing with cash again. Fantastic. Cash, if you pay cash of $1,000, we know that you put cash decreases on this side, and you have no idea what dividends is, and you don't wanna learn, so you just put it on the opposite side.
And then suddenly, okay, for the rest of the test, I know dividends is a normal debit account. So do you see what I'm doing here? This isn't math. This is a puzzle. And I have a couple of constraints. One, I know that I have to have two entries, and two, I know that those two entries must balance, and balance means the debits must equal the credits.
So the trick here is to read the problem. A company paid $1,000 in dividends. They paid cash. Cash went down. I know how to do that. So if cash goes down, and the amount of dividends that we've paid goes up, well, I know how to do cash goes down. I know that it must be debits equals credits for any given two entries. I'm just gonna put dividends over here because then 1,000 equals 1,000.
So let's read the problem again. Made a sale for $500 cash. Well, that means I got cash. Cash goes up, and suddenly you think, "Well, heck, I know how to do that." I'm gonna put cash on the left side because cash went up. When you make a sale, you're gonna increase your revenue. Don't know how to do that? Doesn't matter. Put it on the other side. So then your credits equal your debits of 500 and 500. Good to go.
You bought land for $100,000 cash. Well, if I bought land, I probably spent $100,000 cash, which means my cash went down. But in exchange, I got land, and land went up. So if cash goes down, I know how to do that. For some reason, I can't remember land. Doesn't matter. We know that it has to balance, so put it on the other side. So like I've said a bunch of times before, accounting is pretty logical. Now, obviously, it would be great if you never forgot what kind of account land was. Land is an asset. Assets are debits.
Great. No problem. But here's the thing, you can try to memorize all the debit accounts and all the credit accounts, but that's not gonna be super helpful because you're gonna need to be able to figure things out, and it's much easier to figure things out than to try to memorize everything. So the last thing I'll say, somewhere down here, two entries must balance.
Start with what you know. Start with what you know. If you know cash, start there. If you can pick out any other asset, if you can pick out accounts receivable or land or any other asset that you know for sure, start there. If one of them, like dividends, is kind of foggy in your brain, don't start with dividends. Start with what you know, and then you have two entries that must balance. You've figured out one of them because you know one of them, and you can figure out the other with 0% effort.