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The Account ______THE ACCOUNT  an Account Is an Individual Accounting Record of Increases and Decreases in a Specific Asset, Liability, Or Stockholders’ Equity Item

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The Account ______THE ACCOUNT  an Account Is an Individual Accounting Record of Increases and Decreases in a Specific Asset, Liability, Or Stockholders’ Equity Item 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. + - + - -7- .
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