1. Balance Sheet, T-Accounts and the Simple Ledger  THE RECORDING PROCESS Unit 2

2. THE ACCOUNT  An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.  An account is a page specifically designed to record the changes in each individual item affecting the financial position  Each item will have its own account.  A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.

3. THE LEDGER  The entire group of accounts maintained by a company is referred to collectively as the ledger.  A general ledger contains all the assets, liabilities, and owner’s equity accounts. GENERAL LEDGER

4. ANALYZING THE ACCOUNTING EQUATION  The alignment of these parts resembles the letter T, and therefore the account form is called a T account.

5. ACCOUNTS  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.

6. 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.  Debits are always listed first…before credits DRDR CRCR  The word debit finds its roots in the Latin verb debere, meaning to owe; credit comes from credere, meaning to trust or believe... but you should use the meanings debit (left) and credit (right) for accounting purposes.

7. NORMAL BALANCE  Every account classification has a normal balance, whether it is a debit or credit.

8. ACCOUNT BALANCES

9. INCREASES AND DECREASES IN ACCOUNTS

10. OPENING THE LEDGER  The balance sheet shown below can be visualized as a large "T," with the assets on the left and the liabilities and owner's equity on the right.  This will help you remember that asset accounts normally have debit balances (balances shown on the left side of the T-account), while liability and owner's equity accounts have credit balances (balances shown on the right side of the T-account).

11.  To open accounts in the ledger, these steps should be followed:  Place the account name in the middle of each account.  Record the date and opening balance from the balance sheet on the appropriate side in the account. OPENING THE LEDGER

12. Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited and the owner’s Capital account is credited. DEBITING AN ACCOUNT

13. Example: Monthly rent of $7,000 is paid. Cash is credited and Rent Expense is debited. CREDITING AN ACCOUNT

14. Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited and the owner’s Capital account is credited. DEBITING AN ACCOUNT

15. Example: Monthly rent of $7,000 is paid. Cash is credited and Rent Expense is debited. CREDITING AN ACCOUNT

16. DEBITING AND CREDITING AN ACCOUNT Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.

17. Calculating New Balances in the Accounts  To determine the new account balance, the following calculations are made for each account: 1. Add up the debit side of the account. 2. Add up the credit side of the account. 3. Subtract the smaller amount from the larger and place the answer on the larger side of the account. This is the new balance.

18. Analyzing How Transactions Affect Accounts

19. NORMAL BALANCES — ASSETS AND LIABILITIES Assets Increase Decrease Debit Credit Decrease Increase Debit Credit Liabilities Normal Balance

20. PAID CASH FOR SUPPLIES 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? August 3. Paid cash for supplies, $275.00. 11 2 33 44 1. Which accounts are affected?

21. PAID CASH FOR INSURANCE 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? August 4. Paid cash for insurance, $1,200.00. 11 2 33 44

22. BOUGHT SUPPLIES ON ACCOUNT August 7. Bought supplies on account from Supply Depot, $500.00. 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 11 33 44 22

23. PAID CASH ON ACCOUNT August 11. Paid cash on account to Supply Depot, $300.00. 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 11 33 44 22

24. DOUBLE-ENTRY SYSTEM In a double-entry system, equal debits and credits are made in the accounts for each transaction. Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance. AssetsLiabilitiesEquity

25. Analyzing How Transactions Affect Owner’s Equity Accounts

26. NORMAL BALANCE — OWNER’S CAPITAL Owner’s Capital Decrease Increase Debit Credit Normal Balance

27. RECEIVED CASH FROM SALES August 12. Received cash from sales, $295.00. 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 11 33 44 22

28. SOLD SERVICES ON ACCOUNT August 12. Sold services on account to Oakdale School, $350.00. 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 11 33 44 22

29. PAID CASH FOR AN EXPENSE August 12. Paid cash for rent, $300.00. 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 1 1 4 4 22 3 3 3

30. NORMAL BALANCE — OWNER’S DRAWINGS Owner’s Drawings Normal Balance Increase Decrease Debit Credit

31. PAID CASH TO OWNER FOR PERSONAL USE August 12. Paid cash to owner for personal use, $125.00. 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 4 4 2 2 3 3 3 1 1

32. THE TRIAL BALANCE  A trial balance is a list of accounts and their balances at a given time.  The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after posting.  A trial balance also uncovers errors in journalizing and posting.  The procedures for preparing a trial balance consist of 1. listing the account titles and their balances, 2. totaling the debit and credit columns, and 3. proving the equality of the two columns.

33. PIONEER ADVERTISING AGENCY Trial Balance October 31, 2002 DebitCredit Cash$ 15,200 Advertising Supplies2,500 Prepaid Insurance600 Office Equipment5,000 Notes Payable$ 5,000 Accounts Payable2,500 Unearned Revenue1,200 C. R. Byrd, Capital10,000 C. R. Byrd, Drawings500 Service Revenue10,000 Salaries Expense 900 $ 28,700 The total debits must equal the total credits. A TRIAL BALANCE Rent Expense 4,000

34. LIMITATIONS OF A TRIAL BALANCE  A trial balance does not prove that all transactions have been recorded or that the ledger is correct.  Numerous errors may exist even though the trial balance columns agree.  The trial balance may balance even when 1. a transaction is not journalized, 2. a correct journal entry is not posted, 3. a journal entry is posted twice, 4. incorrect accounts are used in journalizing or posting, 5. offsetting errors are made in recording the amount of the transaction.

35. EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS Liabilities Asset s Owner’s Equity =+- += +- Assets Dr.Cr. + - Liabilities Dr.Cr. - + Dr.Cr. Owner’s Drawings + - Dr.Cr. Revenues - + Dr.Cr. Expenses + - Dr.Cr. Owner’s Capital - +

36. NORMAL BALANCES — REVENUES AND EXPENSES NORMAL BALANCES — REVENUES AND EXPENSES Increase Decrease Debit Credit Expenses Revenues Decrease Increase Debit Credit Normal Balance

37. Summary of Accounting Procedures