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

2. 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 that:
Every business transaction is recorded in at least two accounts.
The total debits recorded for each transaction are 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.

3. Balance Sheet Accounts
LO 2
Balance Sheet Accounts
The debit and credit rules for balance sheet accounts are:
In the accounting equation, assets appear on the left-hand side of the equation while liabilities and stockholders’ 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 stockholders’ equity accounts are increased by credits and decreased by debits.

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

5. LO 2
Dividends
The debit and credit rules for recording dividends are based on the effect of dividends on stockholders’ equity (retained earnings).
The debit and credit rules for recording dividends are based on the effect of the dividends on stockholders’ equity. Since stockholders’ dividends would decrease stockholders’ equity in a business, the dividends account would be increased by debits.

6. 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.

7. 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.

8. Normal Balances LO 2 Increases (Normal Bal.) Decreases
Balance sheet accounts:
Asset Debit Credit
Liability Credit Debit
Stockholders’ Equity:
Capital Stock Credit Debit
Dividends Debit *
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
*The Dividends account is credited only in the case of an error correction.

9. 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.

10. 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)

11. 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)

12. 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.