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, c1494

Receive DEBIT

Give 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.”

3

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

DEBITS received

=

CREDITS given

Liabilities Assets Owner’s Equity

Expenses

Revenues

Net Income 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 Debit balance Right or credit side Credit balance

T-Account Format: An abbreviation for an account record
Any Account
DEBIT (LEFT) SIDE
GENERAL LEDGER CASH
Date Explanation 2005 Jan . 3 Sales 4 Paid Rent Ref. Debit NO. 10

CREDIT (RIGHT) SIDE

Credit Balance $ 100 J1 15,000 15,100 J2 4,000 11,100

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NORMAL BALANCES — ASSETS AND LIABILITIES
Assets
Increase Debit
•Normal Balance

Decrease Credit

Liabilities
Decrease Increase Debit Credit
Normal Balance

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

T-Accounts for Revenues and Expenses
ANY EXPENSE ANY REVENUE

NORMAL BALANCE

NORMAL BALANCE

11

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 Capital Dr. Cr. + Owner’s Dividends Dr. + Cr. -

Assets Dr. + Cr. -

=

Liabilities Dr. Cr. +

+

-

+

Revenues Dr. Cr. +

-

Expenses 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 amounts for each entry can be compared

credit

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 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 account title is indented on the next line.

GENERAL JOURNAL
Date 2005 Sept. 1 Account Titles and Explanation Cash R. Neal, Capital (Invested cash in business) Computer Equipment Cash (Purchased equipment for cash) Ref. Debit 15,000

J1
Credit

15,000

1

7,000 7,000

TECHNIQUE OF JOURNALIZING
The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.

GENERAL JOURNAL
Date 2005 Sept. 1 Account Titles and Explanation Cash R. Neal, Capital (Invested cash in business) Ref. Debit 15,000

J1 Credit

15,000

1 Computer Equipment Cash (Purchased equipment for cash)

7,000 7,000

COMPOUND JOURNAL ENTRY
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.

GENERAL JOURNAL
Date 2005 July 1 Account Titles and Explanation Delivery Equipment Cash Accounts Payable (Purchased truck for cash with balance on account) Ref. Debit 14,000

J1 Credit

1 2

8,000 6,000

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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
PIONEER ADVERTISING AGENCY Trial Balance October 31, 2005
Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C. R. Byrd, Capital C. R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Debit $ 15,200 2,500 600 5,000 Credit

The total debits must equal the total credits.

$ 5,000 2,500 1,200 10,000 500 10,000 4,000 900 $ 28,700

$ 28,700

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