Accounting principles chapter 02
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Accounting
Principles
Second Canadian Edition
Weygandt · Kieso · Kimmel ·
Trenholm
Prepared by:
Carole Bowman, Sheridan College
CHAPTER
2
THE RECORDING PROCESS
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 will have separate accounts for
such items as cash, salaries expense,
accounts payable, and so on.
DEBITS 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 2-1
BASIC FORM OF ACCOUNT
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.
Title of Account
Left or debit side
Right or credit side
Debit balance
Credit balance
ILLUSTRATION 2-2
TABULAR SUMMARY COMPARED TO
ACCOUNT FORM
Tabular Summary
Account Form
Cash
$15,000
- 7,000
1,200
1,500
- 600
- 900
- 200
- 250
600
- 1,300
Cash
$8,050
Debit
15,000
1,200
1,500
600
8,050
Balance
Credit
7,000
600
900
200
250
1,300
DEBITING AN ACCOUNT
Cash
15,000
Example:
Example: The
The owner
owner makes
makes an
an initial
initial investment
investment of
of
$15,000
$15,000 to
tostart
start the
the business.
business. Cash
Cash isisdebited
debited
and
andthe
the owner’s
owner’s Capital
Capital account
account isis credited.
credited.
CREDITING AN ACCOUNT
Cash
7,000
Example:
Example: Monthly
Monthly rent
rentof
of $7,000
$7,000 isis paid.
paid. Cash
Cash isis
credited
credited and
and Rent
Rent Expense
Expense isis debited.
debited.
DEBITING AND CREDITING
AN ACCOUNT
Cash
15,000
8,000
7,000
Example:
Example: Cash
Cash isisdebited
debitedfor
for $15,000
$15,000 and
andcredited
credited for
for
$7,000,
$7,000, leaving
leaving aa debit
debit balance
balance of
of $8,000.
$8,000.
DOUBLE-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 BALANCE
Every account classification has a normal
balance, whether it is a debit or credit.
ILLUSTRATION 2-3
NORMAL BALANCES — ASSETS AND LIABILITIES
Assets
Increase
Normal
Decrease
Balance
Liabilities
Decrease Increase
Debit
Credit
Normal
Balance
ILLUSTRATION 2-4
NORMAL BALANCE — OWNER’S CAPITAL
Owner’s Capital
Decrease
Increase
Debit
Credit
Normal
Balance
ILLUSTRATION 2-5
NORMAL BALANCE — OWNER’S DRAWINGS
Owner’s Drawings
Increase
Normal
Balance
Credit
Decrease
Debit
ILLUSTRATION 2-6
NORMAL BALANCES —
REVENUES AND EXPENSES
Revenues
Decrease Increase
Normal
Balance
Expenses
Increase Decrease
Debit
Credit
Normal
Balance
ILLUSTRATION 2-7
EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS
Assets
Assets
Dr.
+
Cr.
-
= Liabilities
=
Liabilities
Dr.
-
Owner’s Equity
+
+
Cr.
+
Owner’s
Capital
Dr.
-
+
Cr.
+
Revenues
Dr.
-
-
Cr.
+
Owner’s
Drawings
Dr.
+
-
Cr.
-
Expenses
Dr.
+
Cr.
-
ILLUSTRATION 2-9
THE RECORDING PROCESS
JOURNAL
JOURNAL
LEDGER
1. Analyse each transaction.
2. Enter transaction in a journal.
3. Transfer journal information to ledger accounts.
THE 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
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.
JOURNALIZING
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 2-10
TECHNIQUE OF JOURNALIZING
The
The date
date of
of the
the transaction
transaction isis entered
entered in
in the
the date
date column.
column.
J1
GENERAL JOURNAL
Date
2002
Sept. 1
1
Account Titles and Explanation
Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
ILLUSTRATION 2-10
TECHNIQUE OF JOURNALIZING
The
The debit
debit account
account title
title isis entered
enteredat
at the
the extreme
extreme left
left
margin
margin of
of the
the Account
Account Titles
Titles and
and Explanation
Explanation column.
column.
The
The credit
credit account
account title
title isisindented
indented on
on the
the next
next line
line..
J1
GENERAL JOURNAL
Date
2002
Sept. 1
1
Account Titles and Explanation
Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
ILLUSTRATION 2-10
TECHNIQUE OF JOURNALIZING
The
Theamounts
amountsfor
forthe
thedebits
debitsare
arerecorded
recordedin
inthe
theDebit
Debitcolumn
columnand
and
the
theamounts
amountsfor
forthe
thecredits
creditsare
arerecorded
recordedin
inthe
theCredit
Creditcolumn.
column.
J1
GENERAL JOURNAL
Date
2002
Sept. 1
1
Account Titles and Explanation
Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
ILLUSTRATION 2-10
TECHNIQUE OF JOURNALIZING
A
A brief
brief explanation
explanation of
of the
the transaction
transaction isis given.
given.
J1
GENERAL JOURNAL
Date
2002
Sept. 1
1
Account Titles and Explanation
Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
ILLUSTRATION 2-10
TECHNIQUE OF JOURNALIZING
A
A space
space isisleft
left between
between journal
journal entries.
entries. The
The
blank
blank space
space separates
separates individual
individual journal
journal entries
entries
and
and makes
makesthe
the journal
journal easier
easier to
to read.
read.
J1
GENERAL JOURNAL
Date
2002
Sept. 1
1
Account Titles and Explanation
Cash
M. Doucet, Capital
Invested cash in business.
Equipment
Cash
Purchased equipment for cash.
Ref.
Debit
Credit
15,000
15,000
7,000
7,000
