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,
Receive Give
c1494
DEBIT 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.”

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 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
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Liabilities
Assets
Owner’s Equity

Net Income
Revenues
Expenses 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 CREDIT
(LEFT) (RIGHT)
SIDE SIDE

8
NORMAL BALANCES — ASSETS
AND LIABILITIES
Assets
Increase Decrease

•Normal Balance

Liabilities
Debit
Decrease Increase
Credit
Normal
Balance
NORMAL BALANCE — OWNER’S
CAPITAL
Owner’s Capital
Decrease Increase

Normal
DebitBalance
Credit
 T-Accounts for
Revenues and Expenses

ANY EXPENSE ANY REVENUE

NORMAL NORMAL
BALANCE BALANCE

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 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 = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + -
Capital Dividends
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues - Expenses

Dr. Cr. 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 credit
amounts for each entry can be compared
 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
Thedate
dateofofthe
thetransaction
transactionis isentered
enteredinto
intothe
thedate
datecolumn.
column.
The
Thedebit
debitaccount
accounttitle
titleis
isentered
enteredatatthe
theextreme
extremeleft
leftmargin
marginof
of
the
theAccount
AccountTitles
Titlesand
andExplanation
Explanationcolumn.
column. The
Thecredit
creditaccount
account
title is indented on the next line.
title 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)
 TECHNIQUE OF
JOURNALIZING
The
The amounts
amounts for for the
the debits
debits are
are recorded
recorded in in the
the
Debit
Debit column
column andand the
the amounts
amounts forfor the
the credits
credits are
are
recorded
recorded in
in the
the Credit
Credit column.
column.
 COMPOUND JOURNAL
ENTRY
When
When three
three or
or more
more accounts
accounts are are required
required inin
one
one journal
journal entry,
entry, the
the entry
entry is
is referred
referred to
to as
as aa
compound
compound entry.
entry.

3
 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

The total
debits must
equal the total
credits.