Chapter02

Report
Chapter 4
Double-Entry
• An account is an individual
accounting record of increases
and decreases labeled as debits
and credits.
• There are separate accounts for
each classification type such as
cash, salaries expense, accounts
payable, etc.
According to Pacioli, “ Double-entry accounting
is based on a simple concept: each party in a
business transaction will receive something
and give something in return. In accounting
terms, what is received is a debit and what is
given is a credit. The T account is a
representation of a scale or balance.”
Scale or Balance
Luca Pacioli
Developer of
Double-Entry
Accounting,
c1494
Receive
DEBIT
Give
CREDIT
Debits and Credits
• Two of the most familiar accounting terms are
“debits and credits.” In the double-entry
system, debits must always equal credits for
the accounting equation.
• Debit (from the Latin word debere) means
“left.” It is often abbreviated as “dr.”
• Credit (from the Latin word credere) means
“right.” It is often abbreviated as “cr.”
3
DEBITS AND CREDITS
• Recording $s on the left side of an account
is debiting the account
• Recording $s on the right side is crediting
the account
• For individual accounts:
• If the total of debit amounts is bigger than
credits, the account has a debit balance
• If the total of credit amounts is bigger than
debits, the account has a credit balance
TABULAR SUMMARY COMPARED
TO ACCOUNT FORM
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Liabilities
Assets
Expenses
Owner’s Equity
Revenues
Net Income
is part of
owner’s equity
BASIC FORM OF ACCOUNT
• The simplest form an account consists of
1 the title of the account
2 a left or debit side
3 a right or credit side
• The alignment of these parts resembles the letter
T, therefore the name “T account”
Title of Account
Left or debit side
Right or credit side
Debit balance
Credit balance
T-Account Format:
An abbreviation for an account
record
Any Account
DEBIT
(LEFT)
SIDE
CREDIT
(RIGHT)
SIDE
GENERAL LEDGER
CASH
Date
Explanation
2005
Jan . 3 Sales
4 Paid Rent
Ref.
NO. 10
Debit
Credit Balance
$ 100
J1 15,000
15,100
J2
4,000
11,100
8
NORMAL BALANCES — ASSETS
AND LIABILITIES
Assets
Increase
Debit
Decrease
Credit
•Normal
Balance
Liabilities
Decrease Increase
Debit
Credit
Normal
Balance
NORMAL BALANCE — OWNER’S
CAPITAL
Owner’s Capital
Decrease
Debit
Increase
Credit
Normal
Balance
T-Accounts for
Revenues and Expenses
ANY EXPENSE
NORMAL
BALANCE
ANY REVENUE
NORMAL
BALANCE
11
Summarizing the
Rules of Debits and Credits
Normal
Increase Decrease Balance
Assets
DR
CR
DR
Liabilities
CR
DR
CR
Owners’ equity
CR
DR
CR
Revenues
CR
DR
CR
Expenses
DR
CR
DR
12
DOUBLE-ENTRY SYSTEM
• total debits always equal the total
credits
• accounting equation always stays
in balance
Assets
Liabilities
Equity
EXPANDED BASIC EQUATION
AND DEBIT/CREDIT RULES AND
EFFECTS
Assets
Assets
Dr.
+
Cr.
-
= Liabilities
=
Liabilities
Dr.
-
Owner’s Equity
+
+
Cr.
+
Owner’s
Capital
Dr.
-
+
Cr.
+
Revenues
Dr.
-
-
Cr.
+
-
Owner’s
Dividend
s
Dr. Cr.
+
-
Expenses
Dr.
+
Cr.
-
THE JOURNAL
Transactions are initially recorded (journalized) in
chronological order before they are transferred to the ledger
accounts.
A journal makes several contributions to recording
process:
1 discloses in one place the complete effect of a
transaction
2 provides a chronological record of transactions
3 helps to prevent or locate errors as debit and
amounts for each entry can be compared
credit
JOURNALIZING
• Entering transaction data in the journal
is known as journalizing.
• Separate journal entries are made for
each transaction.
• A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be
debited and credited,
3 a brief explanation of transaction.
TECHNIQUE OF
JOURNALIZING
The date of the transaction is entered into the date column.
The debit account title is entered at the extreme left margin of
the Account Titles and Explanation column. The credit account
title is indented on the next line.
J1
GENERAL JOURNAL
Date
2005
Sept. 1
1
Account Titles and Explanation
Cash
R. Neal, Capital
(Invested cash in business)
Computer Equipment
Cash
(Purchased equipment for
cash)
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
TECHNIQUE OF
JOURNALIZING
The amounts for the debits are recorded in the
Debit column and the amounts for the credits are
recorded in the Credit column.
J1
GENERAL JOURNAL
Date
2005
Sept. 1
Account Titles and Explanation
Cash
R. Neal, Capital
(Invested cash in business)
1 Computer Equipment
Cash
(Purchased equipment for
cash)
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
COMPOUND JOURNAL
ENTRY
When three or more accounts are required in
one journal entry, the entry is referred to as a
compound entry.
J1
GENERAL JOURNAL
Date
2005
July 1
1
2
3
Account Titles and Explanation
Delivery Equipment
Cash
Accounts Payable
(Purchased truck for cash
with balance on account)
Ref.
Debit
Credit
14,000
8,000
6,000
THE TRIAL BALANCE
• The trial balance is a list of accounts and
their balances at a given time.
• The primary purpose of a trial balance is
to prove debits = credits after posting.
• If debits and credits do not agree, the
trial balance can be used to uncover
errors in journalizing and posting.
A TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2005
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Fees
C. R. Byrd, Capital
C. R. Byrd, Drawing
Fees Earned
Salaries Expense
Rent Expense
The total debits
must equal the
total credits.
Debit
$ 15,200
2,500
600
5,000
Credit
$ 5,000
2,500
1,200
10,000
500
10,000
4,000
900
$ 28,700
$ 28,700

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