The Accounting Cycle:

Capturing Economic Events

Chapter 3

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
The Ledger

Accounts
Accounts are
are
Cash individual
individual records
records
showing
showing increases
increases
Accounts and
and decreases.
decreases.
Payable

The
The entire
entire group
group of
of
Capital accounts
accounts is is kept
kept
Stock
together
together in in an
an
accounting
accounting record
record
called
called aa ledger.
ledger.
3-2
 The Use of Accounts

Increases are recorded

on one side of the T Title of Account

account, and decreases Left Right

are recorded on the or or
Debit Credit
other side. Side Side

3-3
 Debit and Credit Entries
Cash
Cash
Receipts are 5/1
5/1 8,000
8,000 5/25/2 2,500
2,500 Payments are
on the debit
side. 5/25
5/25 75
75 5/8 2,000
5/8 2,000
on the credit
side.
5/29
5/29 750
750 5/28
5/28 150
150
5/31
5/31 50
50
5/31
5/31 4,125
4,125 The balance is the
The balance is the
Bal.
Bal. difference
differencebetween
betweenthethe
debit
debitandandcredit
creditentries
entries
in
inthe
theaccount.
account.

3-4
 Debit and Credit Entries
Debits and credits affect accounts as follows:

A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

3-5
The Journal
In
In an
an actual
actual accounting
accounting system,
system,
transactions
transactions are
are initially
initially recorded
recorded in
in the
the
journal.
journal.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2009
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
3-6
Posting Journal Entries to the
Ledger Accounts

Posting simply
means updating the
ledger accounts for
the effects of the
transactions
recorded in the
journal.
3-7
 Posting Journal Entries to the
Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2009
May 1 Cash 8,000
Capital Stock 8,000
General
Owners invest Ledger
cash in the business.

Cash
Date Debit Credit Balance
2009
May 1 8,000 8,000
3-8
 Posting Journal Entries to the
Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2009
May 1 Cash 8,000
Capital Stock 8,000
General
Owners invest Ledger
cash in the business.

Capital Stock
Date Debit Credit Balance
2009
May 1 8,000 8,000
3-9
Ledger Accounts After Posting
General Ledger
Cash
Date Debit Credit Balance
2009
May 1 8,000 8,000
2 2,500 5,500

TT accounts
accounts areare simplified
simplified versions
versions of
of
the
the ledger
ledger account
account that
that only
only show
show the
the
debit
debit and
and credit
credit columns.
columns.
3-10
 What is Net Income?
Net
Net income
income is
is not
not an asset it’s
an asset it’s an
an increase
increase
in
in owners’
owners’ equity
equity from
from profits
profits of
of the
the
business.
business.

A = L + OE
Increase Decrease Increase

As income is earned, Net income

either an asset is always results in
increased or a liability is the increase of
decreased. Owners’ Equity
3-11
Revenue and Expenses
The price for
goods sold
and services Increases
rendered during a owners’ equity.
given accounting
period.

The costs of
goods and Decreases
services used up owner’s equity.
in the process of
earning revenue.
3-12
Debit and Credit Rules for
Revenue and Expenses
Expenses EQUITIES Revenues
decrease Debit Credit increase
owners’ for for owners’
equity. Decrease Increase equity.

EXPENSES REVENUES
Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

3-13
 Dividends
Payments to Owners’
EQUITIES
owners investments
decrease Debit Credit increase
for for
owners’ Decrease Increase owners’
equity. equity.

DIVIDENDS CAPITAL STOCK

Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

3-14
End of Chapter 3

3-15