Professional Documents
Culture Documents
Balance sheet on …
Liabilities
Assets
Owner`s equity
Account Terminology and Procedure
Any expense account Any Revenue account
Increases Decreases Decreases Increases
Balance Balance
Balance sheet on …
Expenses Revenues
Profit
Retained earnings (on the Balance sheet)
Decreases
(Loss, Dividends)
Opening balance
Balance sheet on …
Expenses Revenues
Loss
Retained earnings (on the Balance sheet)
Decreases
(Loss, Dividends) Opening
Ending balance balance
Account Terminology and Procedure
Balance of an Account
• Difference between the
–sum of all left-side entries and
–sum of all right-side entries
in an account at any particular time.
Normal Balances of an Account
• –Assets Debit
• –Liabilities Credit
• –Owners‟ Equity Credit
• –(Revenues Credit)
• –(Expenses Debit)
Classification of Accounts
According to their Normal Balance
–Debit balance accounts
• Asset and expense accounts
–Credit balance accounts
• Liabilty, owners‟ equity and revenue
accounts
Classification of Accounts
According to whether they appear on the balance sheet or
not
–Permanent (real) accounts
• appear on the balance sheet:
• assets, liabilities and owners‟ equity
–Temporary (nominal) accounts
• do not appear on the balance sheet but are closed to the
income statement and NOT reopened in the next period.
The balance of the income statement is recorded on the
retained earnings accounts.
Chart of Accounts
• A chart of accounts is a numbered
or coded list of all account titles.
• Account numbers are used as
references in the Post Ref. column
of the journal.
The Journal and the Ledger
General Journal (Book of Original Entry)
• First record of each transaction in an accounting system. A record
of journal entries in chronological order –like a diary.
Subsidiary ledgers
• Provide details for several accounts in the general ledger
• Example: Accounts Receivable Subsidiary Ledger contains a
separate account for each credit customer.
The Trial Balance
• The trial balance is a simple listing of the
accounts in the general ledger together with
their “provisional” balances shown on the
balance sheet or income statement
Journalizing Transactions
• Journalizing is the process of entering
transactions into the general journal.
• A journal entry is an analysis of all the
effects of a single transaction on the various
accounts, usually accompanied by an
explanation.
• A compound entry means that a single
transaction affects more than two accounts.
Journalizing Transactions
• The title of the account or accounts to be debited
are placed at the left margin.
• The title of the account or accounts to be credited
are indented in a consistent way.
• The journal entry is followed by the narrative
explanation of the transaction.
• The Post. Ref. column contains an identifying
number that is assigned to each account and is
used for cross-referencing to the ledger accounts.
Posting Transactions to the Ledger
• Posting is the transferring of amounts from
the journal to the appropriate accounts in
the ledger.
• The following example shows
–How the debit to merchandise inventory and
the credit to cash are posted.
–Columns for dates, explanations, journal
references, and amounts in the ledger.
Preparing the Trial Balance
• A trial balance is a list of all the accounts
with their balances.
The purpose is twofold:
–Check whether the total debits equal the
total credits in the ledger.
–Summarize the balances in the ledger
accounts in preparation to construct the
financial statements.
Closing the Accounts
• Closing the accounts has two purposes:
1. It transfers the balances of the
“temporary” accounts to the “permanent”
stockholders‟ equity account “Retained
Earnings”.
2. The revenue and expense accounts have a
zero balance at the beginning of the next
accounting period.
Effects of Errors
If an error is detected after posting to the
ledger accounts, a correcting entry must be
made.
The following is an example of a correcting
entry:
–Correct entry: Repair Expense to Cash 500
–Erroneous entry: Equipment to Cash 500
–Correcting entry: Repair Expense to
Equipment 500