The Account Chapter 2 The Recording Process Account an individual accounting record of increases and decreases in a specific asset liability or owner s equity item whenever there is a specific account mentioned the name is capitalized In its simplest form an account consists of 3 parts 1 Title 2 Debit or left side 3 Credit or right side Debits and Credits Debit Dr indicates the left side of the account Credit Cr indicates the right side of the account Making an entry on the left side of an account is called debiting the account Making an entry on the right hand side of an account is called crediting the account They do not mean increase or decrease They are used to describe where entries are made in accounts Ex Adding money to an account in cash will be put in the debit section Making a payment will be put in the credit section When comparing the totals of the two sides an account shows a debit balance if the total of the debit amounts exceeds the credits An account shows a credit balance if the credit amounts exceed the debits Every positive item in the tabular summary represents a receipt of cash every negative amount represents a payment of cash In the account form we record the increases in cash as debits and the decreases in cash as credits The balance is determined by netting the two sides subtracting them from one another Debit and Credit Procedure Each transaction must affect two or more accounts to keep the basic account equation in balance For each transaction debits must equal credits The equality of debits and credits provides the basis for the double entry system of recording transactions Dr Cr Procedures for assets and liabilities Asset accounts normally show debit balances That is debits to a specific asset account should exceed credits to that account so on the left hand of the accounting equation there are your assets what this is saying is that when you have assets you want them to be positive because having a negative asset would be a bad thing Liability accounts normally show credit balances That is credits to a liability account should exceed debits to that account On the RIGHT side of the accounting equation you have your liabilities This is saying that if you are liable for something they are usually negative because you owe someone money The Normal Balance of an account is on the side where an increase in the account is recorded SO This means that it is normal for an asset account to have a positive balance on the left side of a T chart If you have negative assets this could be like land or something that means that something probably went wrong Likewise if there are positive debits in a liability account like having a positive balance where you are paying your workers it might mean that something is wrong There are circumstances where this is correct however Stockholders Equity There are 5 subdivisions of stockholders equity Common Stock issued in exchange for the owners investment paid into the corporation They give part of the company to raise money Credits increase in Common Stock account and debits decrease This is because if you are selling stock you get cash which increases the debits as well as increases the credits You get cash and because you are selling stock your credits increase You now owe them money So the normal account balance is positive in the credits side Retained Earnings Net income that is kept in the business Represents the portion of stockholders equity that the company has accumulated through the profitable operation of the business Credits increase the Retained Earnings account and debits decrease it Dividends A company s distribution to its stockholders on a pro rata equal basis Revenues and Expenses When a company earns revenues stockholders equity increases Debits increase the Dividends account and credits decrease it Revenue Accounts Credits increase revenue accounts and debits decrease them Expenses Steps in the Recording Process Credits decrease expense accounts and debits increase them Chapter 2 pg 1 The Journal The Ledger Posting Businesses use three basic steps in the recording process 1 Analyze each transaction for its effects on the accounts 2 Enter the transaction in a journal 3 Transfer the journal information to the appropriate accounts in the ledger Business Documents provide evidence of a transaction occurring Ex Sales slip check bill cash register tape The company then analyzes the evidence to determine the transactions effects on specific accounts Transaction then gets entered into a journal Finally the journal entry is transferred into the designated accounts in the ledger General Journal most typical kind of journal Has spaces for dates account titles and explanations references and two Journal book of original entry The transactions are recorded in chronological order amount columns Makes several significant contributions to the recording process Journalizing The process of entering transaction data in a journal A complete entry consists of 1 It discloses in one place the complete effects of a transaction 2 It provides a chronological record of transactions 3 It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared 1 The date of the transaction 2 the accounts and amounts to be debited and credited 3 A brief explanation of the transaction Simple Entry An entry that only involves two accounts one debit and one credit Compound Entry An entry that requires three or more accounts Simple and Compound Entries Ledger The entire group of accounts maintained by a company It keeps in one place all the information about changes in specific account balances General Ledger Contains all the asset liability and stockholders equity accounts Companies present the ledger in the sequence in which they present the accounts in the financial statements beginning with the balance sheet accounts In order Asset accounts Liability Accounts Stockholders Accounts Equity Accounts Revenues Expenses Three column form of an account Has 3 money columns debit credit and balance The balance is determined after every transaction Explanation space and reference columns are used to provide special information about the transaction Posting Transferring journal entries to the ledger accounts Posting involves the following steps 1 In the ledger enter in the appropriate columns of the accounts debited the date journal page and the debit amount shown in the journal 2 In the reference column of the