CHAPTER 5  Because Capital accounts increase Owner’s

Equity, they are affected by debits and credits as

Double Entry Bookkeeping for A follows:
Service Provider Capital Debit decreases and Credit for
The Accounting Cycle increases
 And because Drawing accounts decrease Owner’s
Gathering of Documents Equity, they are affected by debits and credits as
follows:
Journalize Transactions in the General Journal (book Drawing  Debit for Increase and Credit
of original entry) for Increases
 Because Revenue accounts increase Owner’s
Equity, they are affected by debits and credits as
Post entries to the account in the General Ledger follows:
(books of final entry) Revenue  Debit for decreases and Credit
for increases
Prepare a Trial Balance (list of all accounts range of
Stockholders’ Equity A Closer Look
accounting elements)

The T- Account  And because Expense accounts decrease Owner’s

Equity, they are affected by debits and credits as
 Increases to the T-account are recorded on one follows:
side of the T-account, and decreases are recorded Expenses Debit for Increase and Credit
on the other side. for decrease
 Debit refers to the LEFT and Credit to the
RIGHT side of the T-Account. Normal Balances
 Tools used for recording transactions  Each of the 6 account types also has a normal
o Debit (DR) balance side. It is always the side which is used to
record increases in the account.
o Credit (CR)
 The normal balances for each of the FIVE types
of accounts are as follows:
TYPES OF ACCOUNTS
DEBIT = AWE CREDIT = LIC
 Assets
 Liabilities
Gathering of Documents
 Owner’s Equity
1. Official Receipts
 Drawing
2. Invoices (Service/Sales/Purchase)
 Revenues
3. Vouchers (Check/Cash)
 Expenses
4. Checks
5. Promissory Notes
Using Debits and Credits
6. Statement of Account
 Again, debits and credits are used to increase or
7. Journal Vouchers
decrease account balances.
8. Contracts
 Determining whether to use a debit or credit to 9. Payroll Sheet/Report
record an increase or decrease depends on the type
of account in question. Chart of Accounts
 The Accounting equation is the basis for the  The listing of all accounts and their account
determination. numbers is called the chart of accounts.
 A typical account numbering scheme might appear
as follows:
Assets 100-299

Revenues 600-699

Liabilities 300-499

Expenses 700-799

Equities 500-599
Owner’s Equity A Closer Look

 Recall that Owner’s Equity consists of the

following components:
Capital – Drawings + Revenues – Expenses
Recording Transactions
 Initially, all transactions are recorded in the
General Journal,
 Each transaction always affects at least two
different accounts.
 One account has a debit effect.
 The second account has a credit effect.
 This methodology was named “double entry”
accounting by whom? Luca Pacioli

POSTING to the General Ledger

 General Ledger (GL) is a complete collection of
all the accounts of a company
 Accounts are individually numbered for easy
reference
 It is used to collect the information about all of the
transactions affecting a specific account
 A cumulative, running balance is maintained when
using the 3-column type

Two General Ledger Account Formats

 Three-Amount Column Format
(Debit, Credit, Balance)
- Used in general ledgers in the
business world
 T-Account Format
- Used primarily for teaching
and analysis of complex
transactions

Categories of General Ledger Accounts

The six types of accounts fall into one of two

categories
 Nominal Accounts TRIAL BALANCE
- Nominal accounts include  Used to periodically test whether the General
revenues and expenses. Ledger is in balance.
- Nominal accounts are  Consists of a listing of each account with its
temporary. balance as of a specific date.
- Nominal account balances are All Debit balances are in one
closed out to zero at the end of column.
the fiscal year. All Credit balances are in another
- Closing Entries will be column.
discussed in Chapter 8.
 Real Accounts
- This category includes Assets,
Liabilities, and Owner’s Equity
(i.e., Balance Sheet accounts)
- Accounts are permanent.
- Account balances are carried
forward from one
- fiscal year to the next.
Errors that will not cause the trial balance to be
unequal:
1. Failure to record a transaction or to post a
transaction.
2. Recording the same erroneous amount for both the
debit and the credit parts of a transaction.
3. Recording the same transaction more than once.
4. Posting a part of a transaction correctly as a debit or
credit but to the wrong account.