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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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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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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ANY EXPENSE
NORMAL
BALANCE
ANY REVENUE
NORMAL
BALANCE
T-Accounts forRevenues and Expenses
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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
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