Accounting Accounting PrinciplesPrinciplesSecond Canadian Edit ionSecond Canadian Edit ion
Prepared by: Carole Bowman, Sheridan College
Weygandt · Kieso · Kimmel · Trenholm
THE RECORDING PROCESSTHE RECORDING PROCESS
CHAPTERCHAPTER
22
THE ACCOUNTTHE ACCOUNT
An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.
A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.
DEBITS AND CREDITSDEBITS AND CREDITS
The terms debit and credit mean left and right, respectively.
The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account.
When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance.
DR CR
ILLUSTRATION ILLUSTRATION 2-12-1 BASIC FORM OF ACCOUNTBASIC FORM OF ACCOUNT
Left or debit side
Title of Account
Right or credit side
Debit balance Credit balance
In its simplest form, an account consists of
1. the title of the account,
2. a left or debit side, and
3. a right or credit side. The alignment of these parts resembles the letter T, and
therefore the account form is called a T account.
ILLUSTRATION ILLUSTRATION 2-22-2 TABULAR SUMMARY COMPARED TO TABULAR SUMMARY COMPARED TO
ACCOUNT FORMACCOUNT FORMTabular Summary
Cash
$15,000- 7,000
1,2001,500- 600- 900- 200- 250
CashDebit Credit
15,0001,2001,500
600
7,000600
200900
Balance
Account Form
8,050
$8,050
600- 1,300
2501,300
Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited and the owner’s Capital account is credited.
Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited and the owner’s Capital account is credited.
DEBITING AN ACCOUNTDEBITING AN ACCOUNT
15,000 Cash
Example: Monthly rent of $7,000 is paid. Cash is credited and Rent Expense is debited.
Example: Monthly rent of $7,000 is paid. Cash is credited and Rent Expense is debited.
CREDITING AN ACCOUNTCREDITING AN ACCOUNT
7,000 Cash
DEBITING AND CREDITINGDEBITING AND CREDITING AN ACCOUNT AN ACCOUNT
Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
15,000 7,000 8,000
Cash
DOUBLE-ENTRY SYSTEMDOUBLE-ENTRY SYSTEM
In a double-entry system, equal debits and credits are made in the accounts for each transaction.
Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance.
Assets Liabilities Equity
NORMAL BALANCENORMAL BALANCE
Every account classification has a normal balance, whether it is a debit or credit.
ILLUSTRATION ILLUSTRATION 2-32-3 NORMAL BALANCES — ASSETS AND LIABILITIESNORMAL BALANCES — ASSETS AND LIABILITIES
Assets
Increase Decrease Debit Credit
Decrease Increase Debit Credit
Liabilities
Normal Balance
Normal Balance
ILLUSTRATION ILLUSTRATION 2-42-4 NORMAL BALANCE — OWNER’S CAPITALNORMAL BALANCE — OWNER’S CAPITAL
Owner’s Capital
Decrease Increase Debit Credit
Normal Balance
ILLUSTRATION ILLUSTRATION 2-52-5 NORMAL BALANCE — OWNER’S DRAWINGSNORMAL BALANCE — OWNER’S DRAWINGS
Owner’s Drawings
Normal Balance
Increase Decrease Debit Credit
ILLUSTRATION ILLUSTRATION 2-62-6
NORMAL BALANCES — NORMAL BALANCES — REVENUES AND EXPENSESREVENUES AND EXPENSES
Increase Decrease Debit Credit
Expenses
Revenues
Decrease Increase Debit Credit
Normal BalanceNormal
Balance
ILLUSTRATION ILLUSTRATION 2-72-7 EXPANDED BASIC EQUATION AND EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTSDEBIT/CREDIT RULES AND EFFECTSLiabilitiesAssets Owner’s Equity
= + -
+=
+ -
Assets
Dr. Cr.+ -
Liabilities
Dr. Cr.- +
Dr. Cr.
Owner’s Drawings
+ -
Dr. Cr.
Revenues
- +Dr. Cr.
Expenses
+ -
Dr. Cr.
Owner’s Capital
- +
ILLUSTRATION ILLUSTRATION 2-92-9 THE RECORDING PROCESSTHE RECORDING PROCESS
1. Analyse each transaction. 2. Enter transaction in a journal. 3. Transfer journal information to ledger accounts.
JOURNAL
JOURNAL
LEDGER
THE JOURNALTHE JOURNAL
Transactions are initially recorded in chronological order in a journal before being transferred to the accounts.
Every company has a general journal which contains
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two money columns.
The journal makes several significant contributions to the recording process:
1. It discloses, in one place, the complete effect of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily 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, and
3. a brief explanation of the transaction.
ILLUSTRATION ILLUSTRATION 2-102-10 TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING
The date of the transaction is entered in the date column.The date of the transaction is entered in the date column.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Sept. 1 Cash 15,000 M. Doucet, Capital 15,000
Invested cash in business.
1 Equipment 7,000 Cash 7,000
Purchased equipment for cash.
ILLUSTRATION ILLUSTRATION 2-102-10 TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING
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 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 Credit2002
Sept. 1 Cash 15,000 M. Doucet, Capital 15,000
Invested cash in business.
1 Equipment 7,000 Cash 7,000
Purchased equipment for cash.
ILLUSTRATION ILLUSTRATION 2-102-10 TECHNIQUE OF JOURNALIZINGTECHNIQUE 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.
The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Sept. 1 Cash 15,000 M. Doucet, Capital 15,000
Invested cash in business.
1 Equipment 7,000 Cash 7,000
Purchased equipment for cash.
ILLUSTRATION ILLUSTRATION 2-102-10 TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING
A brief explanation of the transaction is given.A brief explanation of the transaction is given.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Sept. 1 Cash 15,000 M. Doucet, Capital 15,000
Invested cash in business.
1 Equipment 7,000 Cash 7,000
Purchased equipment for cash.
ILLUSTRATION ILLUSTRATION 2-102-10 TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING
A space is left between journal entries. The blank space separates individual journal entries and makes the journal easier to read.
A space is left between journal entries. The blank space separates individual journal entries and makes the journal easier to read.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Sept. 1 Cash 15,000 M. Doucet, Capital 15,000 Invested cash in business.
1 Equipment 7,000 Cash 7,000 Purchased equipment for cash.
ILLUSTRATION ILLUSTRATION 2-102-10 TECHNIQUE OF JOURNALIZINGTECHNIQUE OF JOURNALIZING
The column entitled Ref. is left blank at the time the journal entry is made and is used later when the journal entries are transferred to the ledger accounts.
The column entitled Ref. is left blank at the time the journal entry is made and is used later when the journal entries are transferred to the ledger accounts.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Sept. 1 Cash 15,000 M. Doucet, Capital 15,000 Invested cash in business.
1 Equipment 7,000 Cash 7,000 Purchased equipment for cash.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Oct. 2 Delivery Equipment 14,000 Cash 14,000 Purchased truck for cash.
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
SIMPLE AND COMPOUND SIMPLE AND COMPOUND JOURNAL ENTRIESJOURNAL ENTRIES
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.
ILLUSTRATION ILLUSTRATION 2-112-11 COMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRY
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Oct. 2 Delivery Equipment 34,000 Cash 8,000 Note Payable 26,000 Purchased truck for cash and note payable.
1
2
3
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit2002
Oct. 2 Cash 8,000Delivery Equipment 34,000 Note Payable 26,000 Purchased truck for cash and note payable.
COMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRY
This is the wrong format; all debits must be listed before the credits are listed.
This is the wrong format; all debits must be listed before the credits are listed.
THE LEDGERTHE LEDGER
The entire group of accounts maintained by a company is referred to collectively as the ledger.
A general ledger contains all the assets, liabilities, and owner’s equity accounts.
GENERAL LEDGER
Individual Liabilities
Individual Assets
Individual Owner’s Equity
ILLUSTRATION ILLUSTRATION 2-122-12 THE GENERAL LEDGERTHE GENERAL LEDGER
Equipment
Supplies
Accounts Rec.
Cash
Interest Payable
Salaries Payable
Accounts Payable
Notes Payable
Salaries Expense
Service Revenue
Doucet, Drawings
Doucet, Capital
ILLUSTRATION ILLUSTRATION 2-142-14 POSTING A JOURNAL ENTRYPOSTING A JOURNAL ENTRY
In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal and the account number to which the journal was posted.
J1Date Account Title and Explanation Ref Debit Credit
200201-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000 Invested cash in business.
General Journal
101Date Account Title and Explanation Ref Debit Credit Balance
200201-Sep J1 15,000 15,000
CashGeneral Ledger
ILLUSTRATION ILLUSTRATION 2-142-14 POSTING A JOURNAL ENTRYPOSTING A JOURNAL ENTRY
In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal and the account number to which the journal was posted.
J1Date Account Title and Explanation Ref Debit Credit
200201-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000 Invested cash in business.
General Journal
301Date Account Title and Explanation Ref Debit Credit Balance2002
1-Sep J1 15,000 15,000
M. Doucet, CapitalGeneral Ledger
THE TRIAL BALANCETHE TRIAL BALANCE
A trial balance is a list of accounts and their balances at a given time.
The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after posting.
A trial balance also uncovers errors in journalizing and posting.
The procedures for preparing a trial balance consist of
1. listing the account titles and their balances,
2. totaling the debit and credit columns, and
3. proving the equality of the two columns.
PIONEER ADVERTISING AGENCYTrial Balance
October 31, 2002
Debit CreditCash $ 15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500Unearned Revenue 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawings 500Service Revenue 10,000Salaries Expense
900$ 28,700 $ 28,700
The total debits must equal the total credits.
The total debits must equal the total credits.
ILLUSTRATION ILLUSTRATION 2-282-28 A TRIAL BALANCEA TRIAL BALANCE
Rent Expense4,000
LIMITATIONS OF A LIMITATIONS OF A TRIAL BALANCETRIAL BALANCE
A trial balance does not prove that all transactions have been recorded or that the ledger is correct.
Numerous errors may exist even though the trial balance columns agree.
The trial balance may balance even when1. a transaction is not journalized,2. a correct journal entry is not posted,3. a journal entry is posted twice,4. incorrect accounts are used in journalizing or posting,
5. offsetting errors are made in recording the amount of the transaction.
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