©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter Four The Double-Entry Accounting System

Debit/Credit Terminology T-account Debit Credit Account Title

Debits and Credits Debit = LeftCredit = Right increase debit decrease credit Asset accounts increase on the left or debit side and decrease on the right or credit side. increase creditdecrease debit Liability accounts increase on the right or credit side and decrease on the left or debit side. increase credit decrease debit Equity accounts increase on the right or credit side and decrease on the left or debit side. In every transaction, the total dollar value of all debits equals the total dollar value of all credits.

Double-Entry Accounting Let’s see how debits and credits work by looking at transactions for Collins Consultants.

Event 1: Collins Consultants was established on January 1, 2005, when it acquired $15,000 cash from Collins. 1.Increase assets (cash). 2.Increase equity (common stock). Asset Source Transaction

Event 2: On February 1, Collins Consultants issued a 12%, $10,000 note payable to the National Bank to borrow cash. 1.Increase assets (cash). 2.Increase liabilities (notes payable). Asset Source Transaction

Event 3: On February 17, Collins Consultants purchased $850 of office supplies on account from Morris Supply Company. 1.Increase assets (supplies). 2.Increase liabilities (accounts payable). Asset Source Transaction

Event 4: On February 28, Collins Consultants signed a contract to evaluate the internal control system used by Kendall Food Stores. Kendall paid Collins $5,000 in advance for these future services. 1.Increase assets (cash). 2.Increase liabilities (unearned revenue). Asset Source Transaction

Event 5: On March 1, Collins Consultants received $18,000 from signing a contract to provide professional advice to Harwood Corporation over a one-year period. 1.Increase assets (cash). 2.Increase liabilities (unearned revenue). Asset Source Transaction

Event 6: On April 10, Collins Consultants provided $2,000 of services to Rex Company on account. 1.Increase assets (accounts receivable). 2.Increase equity (consulting revenue). Asset Source Transaction

Event 7: On April 29, Collins Consultants performed services and received $8,400 cash. 1.Increase assets (cash). 2.Increase equity (consulting revenue). Asset Source Transaction

Event 8: On May 1, Collins Consultants loaned Reston Company $6,000. Reston issued a 9% note to Collins. 1.Increase assets (notes receivable). 2.Decrease assets (cash). Asset Exchange Transaction

Event 9: On June 30, Collins purchased office equipment for $42,000 cash. 1.Increase assets (office equipment). 2.Decrease assets (cash). Asset Exchange Transaction

Event 10: On July 31, Collins paid $3,600 cash in advance for a one year lease to rent office space for a one-year period beginning August 1. 1.Increase assets (prepaid rent). 2.Decrease assets (cash). Asset Exchange Transaction

Event 11: On August 8, Collins Consultants collected $1,200 from Rex Company as partial payment of the accounts receivable (see Event 6). 1.Increase assets (cash). 2.Decrease assets (accounts receivable). Asset Exchange Transaction

Event 12: On September 4, Collins Consultants paid employees who worked for the company $2,400 in salaries. 1.Decrease assets (cash). 2.Decrease equity (salaries expense). Asset Use Transaction

Event 13: On September 20, Collins Consultants paid a $1,500 cash dividend to its owner. 1.Decrease assets (cash). 2.Decrease equity (dividends). Asset Use Transaction

Event 14: On October 10, Collins Consultants paid Morris Supply Company the $850 owed from purchasing office supplies on account (see Event 3). 1.Decrease assets (cash). 2.Decrease liabilities (accounts payable). Asset Use Transaction

Event 15: On November 15, Collins completed its consulting evaluation of the internal control system used by Kendall Food Stores (see Event 4). 1.Decrease liabilities (unearned revenue). 2.Increase equity (consulting revenue). Claims Exchange Transaction

Event 16: On December 18, Collins Consultants received a $900 bill from Creative Ads for advertisements which had appeared in regional magazines. Collins plans to pay the bill later. 1.Increase liabilities (accounts payable). 2.Decrease equity (advertising expense). Claims Exchange Transaction

Adjustment 1: Collins Consultants recognized accrued interest on the $6,000 note receivable from Reston (see Event 8). 1.Increase assets (interest receivable). 2.Increase equity (interest revenue). Asset Source Transaction

Adjustment 2: Collins Consultants recognized accrued interest expense on the $10,000 note payable it issued to National Bank (see Event 2). 1.Increase liabilities (interest payable). 2.Decrease equity (interest expense). Claims Exchange Transaction

Adjustment 3: Collins Consultants recognized $800 of accrued but unpaid salaries. 1.Increase liabilities (salaries payable). 2.Decrease equity (salaries expense). Claims Exchange Transaction

Adjustment 4: Collins Consultants recognized $4,000 of depreciation on the office equipment it had purchased on June 30 (see Event 9). 1.Decrease assets (accumulated depreciation). 2.Decrease equity (depreciation expense). Asset Use Transaction

Adjustment 5: Collins Consultants recognized rent expense for the portion of prepaid rent used up since entering the lease agreement on July 31 (see Event 10). 1.Decrease assets (prepaid rent). 2.Decrease equity (rent expense). Asset Use Transaction

Adjustment 6: A physical count at the end of the year indicates that $125 worth of the supplies purchased on February 17 are still on hand (see Event 3). 1.Decrease assets (supplies). 2.Decrease equity (supplies expense). Asset Use Transaction

Adjustment 7: Collins Consultants adjusted its accounting records to reflect revenue earned to date on the contract to provide services to Harwood Corporation for a one-year period beginning March 1 (see Event 5). 1.Decrease liabilities (unearned revenue). 2.Increase equity (consulting revenue). Claims Exchange Transaction

The General Journal Accountants initially record data from source documents into a journal. Special Journals General Journals

The Closing Process Let’s look at the closing entries for Collins Consultants. Establishes zero balances in all revenue, expense, and dividend accounts.

Components of the Annual Report Notes Management’s Discussion & Analysis Audit Opinion

The Securities and Exchange Commission Government Agency Public Companies SEC Rules

End of Chapter Four