Chapter 4 DoubleEntry

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.

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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

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TABULAR SUMMARY COMPARED TO ACCOUNT FORM
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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
Owners Equity
Net Income is part of owners equity
Revenues
Expenses
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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

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T-Account FormatAn abbreviation for an account
record
Any Account
DEBIT (LEFT) SIDE
CREDIT (RIGHT) SIDE
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NORMAL BALANCES ASSETS AND LIABILITIES

• Normal
  Balance
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

Normal Balance


























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NORMAL BALANCE OWNERS CAPITAL
Owners Capital
Decrease Increase




Debit Credit

• Normal Balance

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T-Accounts for Revenues and Expenses
ANY EXPENSE
ANY REVENUE
NORMAL BALANCE
NORMAL BALANCE
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Summarizing theRules 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

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DOUBLE-ENTRY SYSTEM

• total debits always equal the total credits
• accounting equation always stays in balance

Assets
Liabilities
Equity
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EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES
AND EFFECTS




-

-
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EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES
AND EFFECTS



-




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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
  credit amounts for each entry can be compared

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JOURNALIZING

• Entering transaction data in the journal is known
  as journalizing.
• Separate journal entries are made for each
  transaction.
• A complete entry consists of1 the date of the
  transaction,2 the accounts and amounts to be
  debited and credited,3 a brief explanation of
  transaction.

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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)













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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.

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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
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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.

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A TRIAL BALANCE

• The total debits must equal the total credits.