The Account ______THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability, or stockholders’ equity item. A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.
T 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 Right or debit credit side side
T Account
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.
DEBITING AN ACCOUNT
Cash Debits Credits 15,000
Example: The owner (stockholder) invests $15,000 cash to start the business. Cash is debited and Common Stock is credited for $15,000.
-1- The Account ______
CREDITING AN ACCOUNT
Cash Debits Credits 7,000
Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited.
DEBITING AND CREDITING AN ACCOUNT
Cash
Debits Credits 15,000 7,000 8,000
Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
DOUBLE-ENTRY SYSTEM In a double-entry system, equal debits and credits are made in the accounts for each transaction. Total debits will always equal total credits and the accounting equation will always stay in balance. Assets = Liabilities + Equity
-2- The Account ______
ILLUSTRATION 2-3 DEBIT AND CREDIT EFFECTS - ASSETS AND LIABILITIES
Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
NORMAL BALANCE Normal balance is the side where an increase in the account is recorded. Every account has a normal balance, whether it is a debit or credit. The opposite side entries should not exceed the normal balance.
ILLUSTRATION 2-4 NORMAL BALANCES - ASSETS AND LIABILITIES
Assets Liabilities Increase Decrease Decrease Increase Debit Credit Debit Credit
Normal Normal Balance Balance
-3- The Account ______
ILLUSTRATION 2-5 DEBIT AND CREDIT EFFECT - COMMON STOCK
Debits Credits Decrease common stock Increase common stock
ILLUSTRATIONILLUSTRATION 2-6 NORMAL BALANCE -- COMMON STOCK
Common Stock Decrease Increase Debit Credit
Normal Balance
-4- The Account ______
ILLUSTRATION 2-7 DEBIT AND CREDIT EFFECT AND NORMAL BALANCE - RETAINED EARNINGS
Retained Earnings Decrease Increase Debit Credit
Normal Balance
ILLUSTRATION 2-8 DEBIT AND CREDIT EFFECT AND NORMAL BALANCE - DIVIDENDS
Dividends
Increase Decrease Debit Credit
Normal Balance
-5- The Account ______
ILLUSTRATION 2-9 DEBIT AND CREDIT EFFECTS - REVENUES AND EXPENSES
Debits Credits Decrease revenues Increase revenues Increase expenses Decrease expenses
ILLUSTRATIONILLUSTRATION 2-10 NORMAL BALANCES -- REVENUES AND EXPENSES
Revenues Expenses Decrease Increase Increase Decrease Debit Credit Debit Credit
Normal Normal Balance Balance
-6- The Account ______
ILLUSTRATIONILLUSTRATION 2-11 STOCKHOLDERS’ EQUITY RELATIONSHIPS
Balance Sheet
Stockholders’ Equity
Common Stock Retained Earnings (Investments by stockholders) (Net income retained in business)
Net income or Net loss Dividends (Revenues less expenses) Income Statement
Retained Earnings Statement
ILLUSTRATIONILLUSTRATION 2-12 EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS Basic Equation
Assets = Liabilities + Stockholders’ Equity
Expanded Basic Equation Retained Assets = Liabilities + Common + + Revenues Stock Earnings Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + - + - +
- Dividends - Expenses
Dr. Cr. Dr. Cr. + - + -
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