THE ACCOUNTS “3 types” ASSETS= LIABILITIES + OWNERS EQUITY Revenue - Expenses = (net income) Drawings / dividend (-) Investments (+)  A company will have separate accounts for each item (ex: cash, salaries expense, accounts payable)  an individual accounting record of increases and decreases in dollar amounts

DEBITS AND CREDITS Debit = left sideCredit = right DRCR ASSET =L + OE INCREASEDebit (delightful!) Credit (crappy!) DECREASE Credit (crappy!) Debit (delightful!) ASSET =L + OE INCREASE DECREASE

ILLUSTRATION 2-1 : BASIC FORM OF ACCOUNT (T-account) Left or debit side Title of Account Right or credit side Debit balanceCredit balance In its simplest form, an account consists of 1. the title of the account, 2. a left or debit side 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 2-2 TABULAR SUMMARY COMPARED TO ACCOUNT FORM Tabular Summary Cash $15, ,000 1,200 1, Cash DebitCredit 15,000 1,200 1, , Balance Account Form 8,05 0 $8, , ,300

DEBITING AN ACCOUNT 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.

CREDITING AN ACCOUNT Example: Monthly rent of $7,000 is paid. Cash is credited and Rent Expense is debited.

DEBITING AND CREDITING AN ACCOUNT Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.

DOUBLE-ENTRY SYSTEM Value of debit entry the value of the credit entries in every transaction Thus, total debits will always equal the total credits  accounting equation will always stay in balance. AssetsLiabilitiesEquity

ILLUSTRATION 2-7 DEBIT/CREDIT RULES AND EFFECTS, and Normal act. Balances Liabilities Assets 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 2-9 THE RECORDING PROCESS 1. Analyze each transaction. 2. Enter transaction in a journal. 3. Transfer journal information to ledger accounts. JOURNAL LEDGER

ILLUSTRATION 2-10 TECHNIQUE OF JOURNALIZING What is significant about all of the circled info on the General Journal below? GENERAL JOURNAL J1 DateAccount Titles and ExplanationRef.DebitCredit 2002 Sept. 1Cash15,000 M. Doucet, Capital 15,000 Invested cash in business. 1Equipment7,000 Cash 7,000 Purchased equipment for cash.

ILLUSTRATION 2-14 POSTING 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.

THE TRIAL BALANCE A list of accounts and their balances at a given time. Shows that debits and credits are equal after posting. May uncover 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. What problems and limitations are there with a trial balance?

PIONEER ADVERTISING AGENCY Trial Balance October 31, 2002 DebitCredit Cash$ 15,200 Advertising Supplies2,500 Prepaid Insurance600 Office Equipment5,000 Notes Payable$ 5,000 Accounts Payable2,500 Unearned Revenue1,200 C. R. Byrd, Capital10,000 C. R. Byrd, Drawings500 Service Revenue10,000 Salaries Expense 900 $ 28,700 The total debits must equal the total credits. Notice the order of the accounts BS then IS accounts The total debits must equal the total credits. Notice the order of the accounts BS then IS accounts ILLUSTRATION 2-28 A TRIAL BALANCE Rent Expense 4,000