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I'd like to know how this transaction would be debited or credited. And in which journal entry and ledger this transaction would go to #1. Seaside needed additional space and purchased a warehouse to remodel and the land around it. prior to arranging permanent financing, Seaside signed a short term construction...

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  1. Prof

    First, you have to understand the debit and credit rules. Assets are increased by debits and decreased by credits, Liabilities and Capital are increased by credits and decreased by debits. That makes the accounting equation logical. Assets = Liabilities + Capital, or Assets - Liabilities = Capital. Given that equation, every transaction involves an equal amount of debits and credits.

    Recording transactions is a simple matter of deciding what took place in an exchange. You record what you received and you record what you gave up. Usually the record is made in journal entries. It makes no sense to try to memorize journal entries. The idea is to analyze what was exchanged. You received or gave up assets and you use the debit and credit rules to record that. If you get cash, you debit the cash account, but you have to credit something else. For example, in exchange for the cash you performed a service, which means you earned revenue which is an increase in capital, recorded as a credit. If you paid cash in exchange for your room rent, the rent is an expense, which is a reduction of capital, so it is recorded with a debit, and cash decreased so it is recorded as a credit. If you pay cash for a computer, you are increasing one asset, the computer, and decreasing the other asset, cash. You just have to decide what was exchanged before you worry about what to debit or credit.

    You incurred a liability (gave a promise to pay later) so a liability is credited, and you received merchandise, which is asset that is debited. Or you got your promise back because you discharged the liability, so you debit the liability and credit the cash you paid.

    Similarly with capital. You issued stock for cash so you received cash (a debit) and record a credit in owners’ equity representing the owner’s interest in the business assets. Or bought back stock giving up cash (a credit) and reducing the owner’s interest in the business (a debit in a capital account). You increase capital (credit revenue) by providing a service or product. You decreases capital (debit an expense) by using up assets or services. As long as you understand what was exchanged, you can decide what to debit and credit.

    You have to understand that expenses are reduction in capital and revenues are increases in capital. That is why expenses are debits and revenues are credits. You could debit or credit the capital account directly when you have an expense or revenue, but then you would not be able to see the details of how capital changed. Expenses and revenues are just temporary subdivisions of capital that enable you to prepare an income statement and see why capital changed from operating a business.

    So what did you get? Land and building, two assets each having its own cost.

    What did you pay? A promise to pay $50,000 plus interest in 90 days. You record the $50,000 liability. The interest will be recorded when you pay the note.

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