Accounts

1
Accounts

• Account a record in an Accounting System that
  shows increases and decreases in each financial
  statement item
• Ledger a group of accounts for a business
  entity
• Chart of Accounts a list of all the accounts
  used by a company

2
Account Example (Cash)

• Account Balance/Activity
• Beginning Balance (9/1/04)
• Increases to Account
• Decreases to Account
• Ending Balance (9/30/04)

• Effect on Account
• 10,000
• 5,000
• ( 3,000)
• --------------
• 12,000

3
Major Account Classifications

• Balance Sheet
• Assets
• Liabilities
• Owners Equity
• Income Statement
• Revenues
• Expenses

4
Example of a T Account
(a format commonly used to represent an Account)
5
Rules of Debit/Credit Balance Sheet Accounts
6
Rules of Debit/Credit Income Statement
Accounts
Expense Accounts
Revenue Accounts
Credit for increases ()
Credit for decreases (-)
Debit for increases ()
Debit for decreases (-)
7
Transactions

• Economic events that affect the financial
• position of a business the raw material of
• accounting reports
• Each transaction affects at least two accounts
• For each transaction, the sum of the debits
  always equals the sum of the credits (called
  Double Entry Accounting)

8
Recording of Transactions

• Journal transactions are initially recorded as
  debits and credits in the Journal
• Process is called Journalizing
• Ledger debits and credits are transferred from
  the Journal to each account in the Ledger
• Process is called Posting

9
1 2 3 4
Supplies 2 400 00
Cash 2 400 00
Purchased three months of supplies
ACCOUNT NO. 15
ACCOUNT
Supplies
Balance
Post. Ref.
Credit
Debit
Debit
Credit
Date
Item
2 400 00
2 400 00
10
1 2 3 4
Supplies 2 400 00
15
Cash 2 400 00
Purchased three months of supplies
ACCOUNT NO. 15
ACCOUNT
Supplies
Balance
Post. Ref.
Credit
Debit
Debit
Credit
Date
Item
2
2 400 00
2 400 00
11
Cash
ACCOUNT NO. 11
ACCOUNT
Balance
Post. Ref.
Credit
Debit
Debit
Credit
Date
Item
2 000 00
2
5 900 00
Dec. 1
2 400 00
3 500 00
12
11
Cash
ACCOUNT NO. 11
ACCOUNT
Balance
Post. Ref.
Credit
Debit
Debit
Credit
Date
Item
2 000 00
2
5 900 00
2 400 00
3 500 00
Dec. 1
2
13
Flow of Business Transactions
14
Normal Balances of Accounts
Increase (Normal Balances)
Decreases
Balance sheet accounts Asset Debit Credit Liabi
lity Credit Debit Owners Equity Capital
Credit Debit Drawing Debit Credit Income
statement accounts Revenue Credit Debit Expense
Debit Credit
15
Trial Balance

• A summary listing of each account in the
• ledger (titles and balances)
• Prepared at the end of each accounting period
  (usually each month)
• Useful for detecting errors
• Verifying that total debits total credits
• Determining that each account has the correct
  Normal
• Balance
• Performing an analytical review of accounts for
  unusual
• balances

16
NetSolutions Trial Balance December 31, 2005
Cash 2 065 00 Accounts Receivable 2 220
00 Supplies 2 000 00 Prepaid Insurance 2 400
00 Land 20 000 00 Office Equipment 1 800
00 Accounts Payable 900 00 Unearned Rent 360
00 Chris Clark, Capital 25 000 00 Chris Clark,
Drawing 4 000 00 Fees Earned 16 340 00 Wages
Expense 4 275 00 Rent Expense 1 600
00 Utilities Expense 985 00 Supplies Expense 800
00 Miscellaneous Expense 455 00 42 600 00 42
600 00
17
Errors

• Accuracy all steps in the Accounting
• process must be carefully performed and
  reviewed to ensure accurate financial information
• Locating Errors
• Reviewing Trial Balance
• Reviewing and analyzing accounts
• Detecting errors by chance
• Detecting errors through audit procedures

18
Effect of Errors on Trial Balance

• Trial Balance does not balance can result from
  several types of errors (see page 70)
• Trial Balance does balance but may still contain
  errors (see next slide)

19
Trial Balance is in Balance but Contains Errors

• 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.