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Learning Objectives

Understand the double-entry recording

framework and the rules for debit and

credit

Understand the key steps in the

accounting process

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T-Accounts

Each asset, liability, and shareholdersequity category is assigned a T-account. Itlooks like this:

By convention, the T-account separates theincreases from the decreases

Asset A/c

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T-Accounts

Accountants use two convenientabbreviations: debit and credit

Debit is a verb that means record an

entry on the left side of an account

Credit is a verb that means record anentry on the right side of an account.

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T-Account rules

Increases in assets are placed on the left side ofasset t-accounts and decreases in assets areplaced on the right side

Increases in liabilities are placed on the right side

of liability t-accounts and decreases in liabilitiesare placed on the left side

Increases in shareholders equity are placed onthe right side of shareholders equity t-accounts

and decreases in shareholders equity are placedon the left side

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Double-entry book-keeping

(a) An increase in an asset (b) decrease in aliability or (c) decrease in shareholders equityare recorded on the debit side of the respectiveaccounts

(a) a decrease in an asset (b) an increase in aliability or (c) increase in shareholders equityare recorded on the credit side of the respectiveaccounts

Debits = Credits for all transactions and for the

basic equation at any time.

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T-Accounts

Beg. Balance

Increases

DR.

Decreases

CR.

End. Balance

Assets

Decreases

DR.

Beg. Balance

Increases

CR.

End. Balance

Shareholders Equity

Decreases

DR.

Beg. Balance

Increases

CR.

End. Balance

Liabilities

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How does Shareholders Equity change?

= +

+-

+-

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Summary of the Accounting Process

Journalizing

in General

Journal

Periodic Posting

to the Appropriate

Accounts in the

General Ledger

Preparation ofUnadjusted

Trial Balance

Correction and

Adjustments ofthe Unadjusted

Trial Balance

Preparation ofFinancial

Statements

Results of

Events and

Transactions

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Journal Entries

Prior to posting in T-accounts, accountants record atransaction by making a journal entry.

Journal entries are recorded in the General Journal

A journal entry shows both sides of the transaction with the

name of the accounts and their respective debit or credit.

For example, the issuance of Rs. 100,000 worth shares toowners on Jan 1 would be recorded as:

Jan 1 Cash 100,000Share Capital 100,000

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Trial Balance

A list of your accounts with their balances

at a point in time

Device for verifying that the sum of all thedebit balances equals the sum of all credit

balances

The TB is used to create: Profit and Loss Account, Balance Sheet, etc.

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Errors in the Trial Balance

Locating errors

Correcting errors

Hard to detect errors Errors of principle

Errors of omission or repetition

Compensatory errors

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Chapter 2: Review

Terms to know: Account

Assets

Balance

Credit

Debit

Dividends

Double entry system

Expenses

Journal Entry

Posting

Trial Balance

Liabilities

Revenues

Share Capital

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Next Class

Chapter 3