The Accounting Process Module 2 Illustration Debit and Credit Entries Correlated to “The Accounting Course Manual,” Craig M. Pence, 2004 (c) Craig Pence, 2004, All Rights Reserved

(c) Craig Pence, 2004, All Rights Reserved The Accounts In the previous module, we were able to use the table below to keep track of asset, liability and owner’s equity account balances. This is not feasible for a large business. Fifty or so accounts cannot all fit on a single page, and the problem of adding hundreds of positive and negative numbers entered in an account column to determine its balance is too difficult to attempt. The method we use must change! (c) Craig Pence, 2004, All Rights Reserved

Using T-Accounts to Record Transactions The solution? First, place the accounts on separate pages and bind them in a ledger. Then, to simplify the math required to balance the account, divide it into two sides and record increases on one side and decreases on the other. Now the “increases” can be added up and totaled separately from the “decreases.” The two can then just be netted to determine the balance in the account. The Account Debit Side Credit Side (c) Craig Pence, 2004, All Rights Reserved

(c) Craig Pence, 2004, All Rights Reserved Debit and Credit Rules The left side of the account is called the debit side. The right side is the credit side. Increases in accounts are recorded on one side or the other, depending on the type of account. The rules regarding debit and credit entries to accounts are summarized below. (c) Craig Pence, 2004, All Rights Reserved

(c) Craig Pence, 2004, All Rights Reserved Temporary Accounts Temporary accounts are subdivisions of the Capital account that are used to record revenues, expenses and withdrawals. Investments are the only transactions that are recorded directly in the Capital account. The debit and credit rules pertaining to these accounts are shown below. (c) Craig Pence, 2004, All Rights Reserved

Normal Balances in Permanent and Temporary Accounts Combining all these accounts produces the set of debit and credit rules shown below. Note that since an account normally has a positive balance, there will be a normal debit balance in the asset, expense, and Drawing accounts; and a normal credit balance in the liability, Capital, and revenue accounts. (c) Craig Pence, 2004, All Rights Reserved

Recording Transactions in T-Accounts To illustrate the use of debit and credit entries, return to the Fred Tall example from Module 1. When Fred began the business by investing $10,000 of cash and $500 of supplies, the increases in the asset accounts would be recorded by debiting the accounts and the increase in Capital would be recorded with a credit. (c) Craig Pence, 2004, All Rights Reserved

Recording Transactions in T-Accounts, Revenues After making the initial investment, Fred then provided services and earned revenue. In the first instance, cash was received from the customer. In the second, services were performed on account. These transactions would be recorded in T-Accounts, using debits and credits, as follows: (c) Craig Pence, 2004, All Rights Reserved

Recording Transactions in T-Accounts, Expenses and Withdrawals After earning the revenues, Fred withdrew $1,000 of cash from the business. Then the $100 telephone bill was paid and the $200 utility bill was received. These transactions would be recorded as follows: (c) Craig Pence, 2004, All Rights Reserved

(c) Craig Pence, 2004, All Rights Reserved Recording Transactions in T-Accounts, Use, Purchase, and Sale of Assets Fred next recorded the usage of $50 of supplies, the purchase of $2,000 of office equipment, the sale of $100 of supplies, and the collection of $200 of accounts receivable. (c) Craig Pence, 2004, All Rights Reserved

Recording Transactions in T-Accounts, Changes in Liability Accounts Lastly, Fred purchased a $5,000 computer on account, borrowed $3,000 from the bank, and then paid a $200 account payable balance. (c) Craig Pence, 2004, All Rights Reserved

Summarizing Account Balances When it is time to balance the accounts and prepare the statements, the debit and credit entries to each account can be added up, and then netted out to determine the ending balance of the account. This is illustrated for the Cash account below. (c) Craig Pence, 2004, All Rights Reserved

(c) Craig Pence, 2004, All Rights Reserved Summary – All Accounts (c) Craig Pence, 2004, All Rights Reserved

Preparing the Trial Balance The trial balance is merely a listing of all the accounts and their balances. Since debits equal credits, the sum of all the debit balances must equal the sum of all the credit balances. If they do not, then an error has been made. (c) Craig Pence, 2004, All Rights Reserved

Practice, Practice, Practice! The process of recording transactions using debits and credits is not an easy one to learn. You will need to practice the process many times before you become comfortable with it, but be sure to do so! This understanding is fundamental to everything else that is done in our course, so practice, practice, practice! (c) Craig Pence, 2004, All Rights Reserved