Analyzing Transactions LO 2a – Describe and illustrate journalizing transactions using the double-entry accounting system

Double-Entry Accounting System LO 2 Double-Entry Accounting System All businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires: Every business transaction to be recorded in at least two accounts. The total debits recorded for each transaction to be equal to the total credits recorded. All businesses use what is called the double-entry accounting system. The system is based on the accounting equation and requires every transaction to be recorded in at least two accounts and that the total debits recorded for each transaction equal the total credits recorded. The double-entry system is also based on specific rules for recording debits and credits.

Balance Sheet Accounts LO 2 Balance Sheet Accounts The debit and credit rules for balance sheet accounts are as follows: In the accounting equation, assets appear on the left-hand side of the equation while liabilities and owner’s equity appear on the right-hand side of the equation. Since the double-entry accounting system is based on the accounting equation, the rules for debits and credits for balance sheet accounts are based on their relationship to the accounting equation. That is, asset accounts are increased by debits and decreased by credits. Liability accounts and owner’s equity accounts are increased by credits and decreased by debits.

Income Statement Accounts LO 2 Income Statement Accounts The debit and credit rules for income statement accounts are based on their relationship with owner’s equity. The debit and credit rules for income statement accounts are based on their relationship with owner’s equity. Owner’s equity accounts are increased by credits and decreased by debits. Since revenues increase owner’s equity, revenue accounts are increased by credits and decreased by debits. Since expenses decrease owner’s equity, expense accounts are increased by debits and decreased by credits.

LO 2 Owner Withdrawals The debit and credit rules for recording owner’s withdrawals are based on the effect of the owner’s withdrawals on owner’s equity. Since owner’s withdrawals would decrease owner’s equity in a business, the owner’s drawing account would be increased by debits.

LO 2 Normal Balances The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the account. Thus, the normal balance of an account is either a debit or a credit depending on whether increases in the account are recorded as debits or credits. The sum of the increases to any account usually equals or is greater than the sum of decreases to the account. Thus, all accounts have a normal debit or credit balance, depending on whether the debit increases the account or the credit increases the account. For example, since asset accounts are increased by debits, the normal balance of an asset account is a debit balance. Likewise, since revenue accounts are increased by credits, the normal balance of a revenue account is a credit balance. When an account normally having a debit account has a credit balance, or vice versa, an error may have occurred or an unusual situation may exist. In either case, more investigation would probably be needed.

Rules of Debit and Credit – Normal Balances of Accounts LO 2 Rules of Debit and Credit – Normal Balances of Accounts For example, since asset accounts are increased by debits, the normal balance of an asset account is a debit balance. Likewise, since revenue accounts are increased by credits, the normal balance of a revenue account is a credit balance. When an account normally having a debit account has a credit balance, or vice versa, an error may have occurred or an unusual situation may exist. In either case, more investigation would probably be needed.

Normal Balances LO 2 Increases (Normal Bal.) Decreases Balance sheet accounts: Asset Debit Credit Liability Credit Debit Owner’s Equity: Capital Credit Debit Drawing Debit Credit Income statement accounts: Revenue Credit Debit Expense Debit Credit

LO 2 Journalizing A transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing. The entry in the journal is called a journal entry. The journal is a book or computer file in which transactions are recorded individually, using the rules of debits and credits. The journal serves as a record of when transactions occurred and were recorded.

Journalizing Journalizing requires the following steps: Step 1. The date of the transaction is entered in the Date column. Step 2. The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column. Recording transactions in a journal requires several steps. The date of the transaction is entered in the Date column. The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column. (continued)

LO 2 Journalizing Step 3. The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column. Step 4. A brief description may be entered below the credited account. The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column. A brief description may be entered below the credited account. (continued)

LO 2 Journalizing Step 5. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later when the journal entry amounts are transferred to the accounts in the ledger. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded.