Financial Accounting Notes 6

7/29/2019 Financial Accounting Notes 6

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Chapter 4Double-Entry

An account is an individualaccounting record of increasesand decreases labeled as debitsand credits.

There are separate accounts for each classification type such ascash , salaries expense , accountspayable , etc.


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According to Pacioli, Double -entry accountingis based on a simple concept: each party in a

business transaction will receive somethingand give something in return. In accountingterms, what is received is a debit and what isgiven is a credit. The T account is a

representation of a scale or balance.

Luca PacioliDeveloper of Double-Entry

Accounting,c1494

Scale or Balance

ReceiveDEBIT

GiveCREDIT


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3

Debits and Credits

Two of the most familiar accounting terms aredebits and credits. In the double-entrysystem, 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) meansright. It is often abbreviated as cr.


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DEBITS AND CREDITS

Recording $s on the left side of an accountis debiting the account

Recording $s on the right side is creditingthe account For individual accounts:

If the total of debit amounts is bigger thancredits, the account has a debit balance

If the total of credit amounts is bigger thandebits, the account has a credit balance


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TABULAR SUMMARY COMPAREDTO ACCOUNT FORM


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Expanded Accounting Equation

The basic accounting equation can be

expanded to include all five financial categoriesindicating what has been received and given.

Expenses

Liabilities

Owners Equity Assets

DEBITS received

CREDITS given=

Revenues Net Incomeis part of owners equity


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BASIC FORM OF ACCOUNT

The simplest form an account consists of 1 the title of the account2 a left or debit side3 a right or credit side

The alignment of these parts resembles theletter T, therefore the name T account

Left or debit side

Title of Account

Right or credit side

Debit balance Credit balance


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8

Any Account

DEBIT(LEFT)SIDE

CREDIT(RIGHT)

SIDE

T-Account Format:An abbreviation for an account

record

GENERAL LEDGERCASH NO. 10

Date Explanation Ref. Debit Credit Balance2005 $ 100

Jan . 3 Sales J1 15,000 15,1004 Paid Rent J2 4,000 11,100


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NORMAL BALANCES ASSETSAND LIABILITIES

AssetsIncrease DecreaseDebit Credit

Decrease IncreaseDebit Credit

Liabilities

NormalBalance

NormalBalance


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NORMAL BALANCE OWNERSCAPITAL

Owners Capital

Decrease Increase

Debit Credit

NormalBalance


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11

ANY EXPENSE

NORMAL

BALANCE

ANY REVENUE

NORMAL

BALANCE

T-Accounts forRevenues and Expenses


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12

Summarizing theRules of Debits and Credits

NormalIncrease Decrease Balance

Assets DR CR DRLiabilities CR DR CROwners equity CR DR CR

Revenues CR DR CRExpenses DR CR DR


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DOUBLE-ENTRY SYSTEM

total debits always equal the totalcredits

accounting equation always staysin balance

Assets Liabilities Equity


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EXPANDED BASIC EQUATIONAND DEBIT/CREDIT RULES AND

EFFECTSLiabilitiesAssets Owners Equity

= + -

+=

+ -

Assets

Dr. Cr.+ -

Liabilities

Dr. Cr.- +

Dr. Cr.

OwnersDividends

+ -

Dr. Cr.

Revenues

- +Dr. Cr.

Expenses

+ -

Dr. Cr.

OwnersCapital

- +


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Transactions a re initially recorded (journalized) inchronological order before they are transferred to the ledger accounts.

A journal makes several contributions to recordingprocess:1 discloses in one place the complete effect of a

transaction2 provides a chronological record of transactions

3 helps to prevent or locate errors as debit and creditamounts for each entry can be compared

THE JOURNAL


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JOURNALIZING

Entering transaction data in the journalis 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.


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TECHNIQUE OFJOURNALIZING

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 accounttitle is indented on the next line.

GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005

Sept. 1 Cash 15,000 R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000 Cash 7,000

(Purchased equipment for cash)


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TECHNIQUE OFJOURNALIZING

The amounts for the debits are recorded in theDebit column and the amounts for the credits arerecorded in the Credit column.

GENERAL JOURNAL J1Date Account Titles and Explanation Ref. Debit Credit2005

Sept. 1 Cash 15,000R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000Cash 7,000

(Purchased equipment for cash)


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When three or more accounts are required inone journal entry, the entry is referred to as acompound entry .

COMPOUND JOURNALENTRY

2

1

3

GENERAL JOURNAL J1Date Account Titles and Explanation Ref. Debit Credit2005

July 1 Delivery Equipment 14,000Cash 8,000Accounts Payable 6,000

(Purchased truck for cashwith balance on account)


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THE TRIAL BALANCE

The trial balance is a list of accounts andtheir balances at a given time.

The primary purpose of a trial balance isto prove debits = credits after posting.

If debits and credits do not agree, thetrial balance can be used to uncover errors in journalizing and posting.


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PIONEER ADVERTISING AGENCYTrial Balance

October 31, 2005

Debit CreditCash $ 15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500

Unearned Fees 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Fees Earned 10,000Salaries Expense 4,000Rent Expense 900

$ 28,700 $ 28,700

The totaldebits must equal the total

credits.

A TRIAL BALANCE

Documents

Financial Accounting Notes 6