Chapter 4Chapter 4Double-EntryDouble-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.”

Luca PacioliDeveloper ofDouble-EntryAccounting,

c1494

Scale or Balance

ReceiveDEBIT

GiveCREDIT

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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.”

DEBITS AND CREDITSDEBITS 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 TABULAR SUMMARY COMPARED TO ACCOUNT FORMTO ACCOUNT FORM

Expanded Accounting EquationExpanded Accounting EquationExpanded Accounting EquationExpanded Accounting Equation

“ The basic accounting equation can be

expanded to include all five financial categories

indicating what has been received and given.”

Expenses

Liabilities

Owner’s EquityAssets

DEBITSreceived

CREDITSgiven=

RevenuesNet Income is part of

owner’s equity

BASIC FORM OF ACCOUNTBASIC FORM OF ACCOUNT

• The simplest form an account consists of1 the title of the account2 a left or debit side3 a right or credit side

• The alignment of these parts resembles the letter T, therefore the name “T account”

Left or debit side

Title of Account

Right or credit side

Debit balance Credit balance

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Any Account

DEBIT(LEFT)SIDE

CREDIT(RIGHT)

SIDE

T-Account Format:An abbreviation for an account

record

NORMAL BALANCES — ASSETS NORMAL BALANCES — ASSETS AND LIABILITIESAND LIABILITIES

AssetsIncrease Decrease Debit CreditDecrease Increase Debit Credit

Liabilities

•Normal Balance

Normal

Balance

NORMAL BALANCE — OWNER’S NORMAL BALANCE — OWNER’S CAPITALCAPITAL

Owner’s Capital

Decrease Increase Debit Credit

Normal Balance

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ANY EXPENSE

NORMALBALANCE

ANY REVENUE

NORMALBALANCE

T-Accounts for Revenues and Expenses

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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

DOUBLE-ENTRY SYSTEMDOUBLE-ENTRY SYSTEM

• total debits always equal the total credits

• accounting equation always stays in balance

Assets Liabilities Equity

EXPANDED BASIC EQUATION EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND AND DEBIT/CREDIT RULES AND

EFFECTSEFFECTSLiabilitiesAssets Owner’s Equity

= + -

+=

+ -

Assets

Dr. Cr.+ -

Liabilities

Dr. Cr.- +

Dr. Cr.

Owner’s Dividend

s

+ -

Dr. Cr.

Revenues

- +Dr. Cr.

Expenses

+ -

Dr. Cr.

Owner’s Capital

- +

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

THE JOURNALTHE JOURNAL

JOURNALIZINGJOURNALIZING

• 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 TECHNIQUE OF JOURNALIZINGJOURNALIZING

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.

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 J1

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

TECHNIQUE OF TECHNIQUE OF JOURNALIZINGJOURNALIZING

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

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

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

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

COMPOUND JOURNAL COMPOUND JOURNAL ENTRYENTRY

2

1

3

THE TRIAL BALANCETHE 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.

The total debits must equal the total credits.

The total debits must equal the total credits.

A TRIAL BALANCEA TRIAL BALANCE