The Account ______THE ACCOUNT  An account is an individual record of increases and decreases in a specific , liability, or stockholders’ item.  A company will have separate accounts for such items as cash, salaries , 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 are made in the accounts for each transaction.  Total debits will always equal total credits and the will always stay in balance. = 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

Increase Decrease Debit Credit

Normal Balance

-5- The Account ______

ILLUSTRATION 2-9 DEBIT AND CREDIT EFFECTS - AND

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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