Presentation on theme: "THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. A company."— Presentation transcript:
1 THE ACCOUNTAn 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.
2 DEBITS AND CREDITSThe 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.DRCR
3 ILLUSTRATION 2-1 BASIC FORM OF ACCOUNT In its simplest form, an account consists of1. the title of the account,2. a left or debit side, and3. a right or credit side.The alignment of these parts resembles the letter T, and therefore the account form is called a T account.Left or debit sideTitle of AccountRight or credit sideDebit balanceCredit balance
4 DEBITING AN ACCOUNTExample: The owner makes an initial investment of $15,000 to start the business. Cash is debited and the owner’s Capital account is credited.
5 CREDITING AN ACCOUNTExample: Monthly rent of $7,000 is paid. Cash is credited and Rent Expense is debited.
6 DEBITING AND CREDITING AN ACCOUNT Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
7 DOUBLE-ENTRY SYSTEM Assets Liabilities Equity 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.AssetsLiabilitiesEquity
8 NORMAL BALANCEEvery account classification has a normal balance, whether it is a debit or credit.
9 ILLUSTRATION 2-3 NORMAL BALANCES — ASSETS AND LIABILITIES Increase Decrease Debit CreditDecrease Increase Debit CreditLiabilitiesNormal BalanceNormal Balance
10 ILLUSTRATION 2-4 NORMAL BALANCE — OWNER’S CAPITAL Decrease Increase Debit CreditNormal Balance
12 NORMAL BALANCES — REVENUES AND EXPENSES ILLUSTRATION 2-6NORMAL BALANCES —REVENUES AND EXPENSESRevenuesDecrease Increase Debit CreditIncrease Decrease Debit CreditExpensesNormal BalanceNormal Balance
13 ILLUSTRATION 2-7 EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS AssetsLiabilitiesOwner’s Equity=+AssetsDr.Cr.LiabilitiesDr.Cr.Dr.Cr.Owner’s CapitalDr.Cr.Owner’s Drawings=+-Dr.Cr.RevenuesDr.Cr.Expenses+-
14 ILLUSTRATION 2-9 THE RECORDING PROCESS JOURNALLEDGERJOURNAL1. Analyse each transaction.2. Enter transaction in a journal.3. Transfer journal information to ledger accounts.
15 THE JOURNALTransactions are initially recorded in chronological order in a journal before being transferred to the accounts.Every company has a general journal which contains1. spaces for dates,2. account titles and explanations,3. references, and4. two money columns.
16 THE JOURNALThe 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.
17 JOURNALIZINGEntering transaction data in the journal is known as journalizing.Separate journal entries are made for each transaction.A complete entry consists of1. the date of the transaction,2. the accounts and amounts to be debited and credited, and3. a brief explanation of the transaction.
18 SIMPLE AND COMPOUND JOURNAL ENTRIES If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.GENERAL JOURNALJ1DateAccount Titles and ExplanationRef.DebitCredit2002Oct. 2Delivery Equipment14,000Cash14,000Purchased truck for cash.
19 ILLUSTRATION 2-11 COMPOUND JOURNAL ENTRY When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.GENERAL JOURNALJ1DateAccount Titles and ExplanationRef.DebitCredit2002Oct. 2Delivery Equipment34,0001Cash8,0002Note Payable26,0003Purchased truck for cashand note payable.
20 COMPOUND JOURNAL ENTRY This is the wrong format; all debits must be listed before the credits are listed.GENERAL JOURNALJ1DateAccount Titles and ExplanationRef.DebitCredit2002Oct. 2Cash8,000Delivery Equipment34,000Note Payable26,000Purchased truck for cashand note payable.
21 THE LEDGERThe 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
22 ILLUSTRATION 2-12 THE GENERAL LEDGER Individual AssetsIndividual LiabilitiesIndividual Owner’s EquityEquipmentInterest PayableSalaries PayableAccounts PayableNotes PayableSalaries ExpenseSuppliesService RevenueAccounts Rec.Doucet, DrawingsCashDoucet, Capital
23 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.
24 ILLUSTRATION 2-14 POSTING 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.
25 THE TRIAL BALANCEA 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 of1. listing the account titles and their balances,2. totaling the debit and credit columns, and3. proving the equality of the two columns.
26 ILLUSTRATION 2-28 A TRIAL BALANCE PIONEER ADVERTISING AGENCYTrial BalanceOctober 31, 2002DebitCreditCash$ 15,200Advertising Supplies2,500Prepaid Insurance600The total debits must equal the total credits.Office Equipment5,000Notes Payable$ 5,000Accounts Payable2,500Unearned Revenue1,200C. R. Byrd, Capital10,000C. R. Byrd, Drawings500Service Revenue10,000Salaries Expense4,000Rent Expense900$ 28,700$ 28,700
27 LIMITATIONS OF A TRIAL 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.