Accounting Credit Rule

8/4/2019 Accounting Credit Rule

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DoubleDouble--EntryEntry

An account is an individualaccounting record of increases

and decreases labeled as debitsand credits.

There are separate accounts foreach classification type such as

cash, salaries expense, accountspayable, etc.


2/21

According to Pacioli, Double-entry accounting

is based on a simple concept: each party in a

business transaction will receive something

and give something in return. In accounting

terms, what is received is a debit and what is

given is a credit. The T account is a

representation of a scale or balance.

Luca PacioliDeveloper ofDouble-EntryAccounting,

c1494

Scale or Balance

ReceiveDEBIT

GiveCREDIT


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3

Debits and Credits

Two of the most familiar accounting terms are

debits and credits. In the double-entry

system, debits must always equal credits for

the accounting equation.

Debit (from the Latin word debere) means

left. It is often abbreviated as dr.

Credit (from the Latin word credere) meansright. It is often abbreviated as cr.


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DEBITS AND CREDITSDEBITS AND CREDITS

Recording $s on the left side of an accountis debiting the account

Recording $s on the right side is creditingthe account

For individual accounts: If the total of debit amounts is bigger than

credits, the account has a debit balance

If the total of credit amounts is bigger thandebits, the account has a credit balance


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TABULAR SUMMARY COMPAREDTABULAR SUMMARY COMPARED

TO ACCOUNT FORMTO ACCOUNT FORM


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Expanded Accounting EquationExpanded Accounting Equation

Expanded Accounting EquationExpanded Accounting Equation

The basic accounting equation can beexpanded to include all five financial categories

indicating what has been received and given.

Expenses

Liabilities

Owners EquityAssets

DEBITSreceived CRED

ITSgiven=

RevenuesNet Income

is part ofowners equity


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BASIC FORM OF ACCOUNTBASIC FORM OF ACCOUNT

The simplest form an account consists of

1 the title of the account

2 a left or debit side

3 a right or credit side

The alignment of these parts resembles the letterT, therefore the name T account

Left or debit side

Title of Account

Right or credit side

Debit balance Credit balance


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8

Any Account

DEBIT(LEFT)

SIDE

CREDIT(RIGHT)

SIDE

T-Account Format:

An abbreviation for an account

record

GENERAL LEDGER

CASH NO. 10

Date Explanation Ref. Debit Credit Balance

2005 $ 100Jan . 3 Sales J1 15,000 15,100

4 Paid Rent J2 4,000 11,100


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NORMAL BALANCESNORMAL BALANCES ASSETSASSETS

AND LIABILITIESAND LIABILITIES

Assets

Increase DecreaseDebit Credit

Decrease IncreaseDebit Credit

Liabilities

Normal

Balance

Normal

Balance


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NORMAL BALANCENORMAL BALANCE OWNERSOWNERS

CAPITALCAPITALOwners Capital

Decrease Increase

Debit Credit

NormalBalance


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11

ANY EXPENSE

NORMAL

BALANCE

ANY REVENUE

NORMAL

BALANCE

T-Accounts for

Revenues and Expenses


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12

Summarizing the

Rules of Debits and Credits

Normal

Increase Decrease Balance

Assets DR CR DR

Liabilities CR DR CR

Owners equity CR DR CR

Revenues CR DR CRExpenses DR CR DR


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DOUBLEDOUBLE--ENTRY SYSTEMENTRY SYSTEM

total debits always equal the totalcredits

accounting equation always staysin balance

Assets Liabilities Equity


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EXPANDED BASIC EQUATIONEXPANDED BASIC EQUATION

AND DEBIT/CREDIT RULES ANDAND DEBIT/CREDIT RULES AND

EFFECTSEFFECTSLiabilitiesAssets Owners Equity

= + -

+=

+ -

Assets

Dr. Cr.

+ -

Liabilities

Dr. Cr.

- +

Dr. Cr.

OwnersDividend

s

+ -

Dr. Cr.

Revenues

- +

Dr. Cr.

Expenses

+ -

Dr. Cr.

OwnersCapital

- +


15/21

Transactions are initially recorded (journalized) inchronological order before they are transferred to the ledgeraccounts.

Ajournal makes several contributions to recording

process:1 discloses in one place the complete effect of a

transaction

2 provides a chronological record of transactions

3 helps to prevent or locate errors as debit and creditamounts for each entry can be compared

THE JOURNALTHE JOURNAL


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JOURNALIZINGJOURNALIZING

Entering transaction data in the journalis known asjournalizing.

Separate journal entries are made foreach transaction.

A complete entry consists of:1 the date of the transaction,

2 the accounts and amounts to bedebited and credited,

3 a brief explanation of transaction.


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TECHNIQUE OFTECHNIQUE OF

JOURNALIZINGJOURNALIZINGThe date of the transaction is entered into the date column.The debit account title is entered at the extreme left margin ofthe Account Titles and Explanation column. The credit accounttitle is indented on the next line.

GENERAL JOURNAL J1

Date Account Titles and Explanation Ref. Debit Credit

2005Sept. 1 Cash 15,000

R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000Cash 7,000

(Purchased equipment forcash)


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TECHNIQUE OFTECHNIQUE OF

JOURNALIZINGJOURNALIZINGThe amounts for the debits are recorded in the

Debit column and the amounts for the credits arerecorded in the Credit column.

GENERAL JOURNAL J1Date Account Titles and Explanation Ref. Debit Credit

2005

Sept. 1 Cash 15,000

R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000

Cash 7,000

(Purchased equipment forcash)


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When three or more accounts are required inone journal entry, the entry is referred to as acompound entry.

COMPOUND JOURNALCOMPOUND JOURNAL

ENTRYENTRY

2

1

3

1

ate ccount itles and planation ef. e it redit

2uly 1 eli ery quipment 1 ,

ash 8,ccounts aya le 6,

urchased truc for cashith alance on account


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THE TRIAL BALANCETHE TRIAL BALANCE

The trial balance is a list of accounts andtheir balances at a given time.

The primary purpose of a trial balance isto prove debits = credits after posting.

If debits and credits do not agree, thetrial balance can be used to uncovererrors in journalizing and posting.


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PIONEER ADVERTISING AGENCY

Trial Balance

October 31, 2005

Debit CreditCash $ 15,200Advertising Supplies 2,500Prepaid Insurance 600Office Equipment 5,000Notes Payable $ 5,000Accounts Payable 2,500

Unearned Fees 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Fees Earned 10,000Salaries Expense 4,000Rent Expense 900

$ 28,700 $ 28,700

The total debitsmust equal thetotal credits.

The total debitsmust equal thetotal credits.

A TRIAL BALANCEA TRIAL BALANCE

Accounting Credit Rule

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