Practical Application in Accounting: Evaluating Debit & Credit Business Transactions

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Understanding the definition and correct use of debits and credits is a key component of accurate accounting. You'll get to learn more about that and get to evaluate a scenario in which you will correct errors in debit and credit entries.

Dual-Entry Accounting

Dual-entry accounting is a widely used accounting system that allows professionals to quickly identify an error. This is important because it allows inaccuracies to be corrected before they are actually used as a basis for more widely-consumed financial statements. The ''dual'' in ''dual-entry accounting'' refers to debits and credits.

The concept behind dual-entry accounting (and therefore debits and credits) can be illustrated by considering the popular board game Monopoly. When a player wants to buy a property on the board, they give cash to the bank. In exchange for the player's cash, the bank gives the player a deed to the property. In this scenario, a player's cash is decreased (debited) and their real estate assets are increased (credited). In this example, the player's cash and the real estate are considered T-Accounts because they help bookkeepers quickly visualize the coming and going of money from the company's finances.

Now, check out the scenario below. You'll be asked to identify and correct errors related to the debits and credits in the fictional ledger below.

The Scenario: Confusing Debits and Credits

Maria is the controller for a company with six health food stores across the region. Each store is semi-autonomous, but Maria is responsible for ensuring that all accounting processes are reliable and accurate. Recently, while evaluating third quarter financial data, Maria noticed that the accounting ledger for one of the six stores had numerous variances from the budget. The ledger below represents the relevant section that Maria was evaluating.

The Relevant Portion of the Ledger

Transaction No. Date Account Debit Credit Memo
100 9-1 Cash - $204.56 Payment for invoice #88503
- - Inventory - $204.56 Receipt #982134
101 9-2 Accounts Receivable $895.56 - Purchase Order #122112
- - Inventory - $985.56
102 9-4 Accounts Receivable $5,866.33 - Payment for Invoice #669552
- - Accounts Payable - $5,866.33 Cash received payment on Invoice #669552
103 9-7 Insured Loss Reimbursement $10,856.23 - Issued to replace inventory loss due to theft. Check #554
- - Inventory - $10,856.23
104 9-7 Cash $656.23 - Cash received, deposited to account #188068
- - Inventory - $656.23 Revenue from sales
  • After reviewing the ledger that Maria is evaluating, make a list of the problems you expect that she will have identified.
  • For each problem, choose and articulate the best way for Maria to correct the errors.

After responding to these tasks on your own, compare your results to those below to see how you fared at correcting the debits and credits.

Identifying the Problems and Corrections

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