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Chapter 4 Double-Entry

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.

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Chapter 4 Double-Entry

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  1. Chapter 4Double-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.

  2. 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

  3. 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.”

  4. 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

  5. TABULAR SUMMARY COMPARED TO ACCOUNT FORM

  6. 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 Net Income is part of owner’s equity Revenues Expenses

  7. Title of Account Left or debit side Right or credit side Debit balance Credit balance 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”

  8. T-Account Format:An abbreviation for an account record Any Account DEBIT (LEFT) SIDE CREDIT (RIGHT) SIDE

  9. Assets Increase Decrease Debit Credit Liabilities Decrease Increase Debit Credit NORMAL BALANCES — ASSETS AND LIABILITIES • Normal Balance Normal Balance

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

  11. T-Accounts for Revenues and Expenses ANY EXPENSE ANY REVENUE NORMAL BALANCE NORMAL BALANCE

  12. Summarizing theRules of Debits and Credits Normal IncreaseDecreaseBalance Assets DR CR DR Liabilities CR DR CR Owners’ equity CR DR CR Revenues CR DR CR Expenses DR CR DR

  13. DOUBLE-ENTRY SYSTEM • total debits always equal the total credits • accounting equation always stays in balance Assets Liabilities Equity

  14. EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS Liabilities Assets Owner’s Equity Owner’s Capital Owner’s Dividends Assets Liabilities Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + + - Revenues Expenses Dr. Cr. Dr. Cr. - + + - = + = + - + -

  15. THE JOURNAL Transactions are initially recorded (journalized) in chronological order before they are transferred to the ledger accounts. Ajournal 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

  16. 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.

  17. J1 GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit 2005 Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 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. 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)

  18. 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.

  19. COMPOUND JOURNAL ENTRY When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. 1 2 3

  20. 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.

  21. A TRIAL BALANCE The total debits must equal the total credits.

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