Accounting Chapter 3 | 3.2 Accounts, Debits, and Credits

____________ decrease stockholders' equity. Thus, expense accounts are increased by ______ and decreased by ________. The effects of debits and credits on revenues and expenses are shown in Illustration 3.14.

Expenses debits credits.

Retained earnings represents the?

portion of stockholders' equity that has been accumulated through the profitable operation of the company.

The procedure of recording debits and credits in an account is shown in Illustration 3.6 for the transactions affecting the Cash account of Sierra Corporation. ~Illustration 3.6- Tabular summary and account for for Sierra Corporation's Cash account. The data are taken from the Cash column of the tabular summary in Illustration 3.4. Every positive item in the tabular summary represents a __________ __ ____; every negative amount represents a ______________ __ ____. Notice that in the account form, we record the increases in cash as _______ and the decreases in cash as ________. For example, the $10,000 receipt of cash (in blue) is debited to Cash, and the −$5,000 payment of cash (in red) is credited to Cash. Having increases on one side and decreases on the other reduces recording _________ and helps in determining the totals of each side of the account as well as the account balance. The balance is determined by netting the two sides (subtracting one amount from the other). The account balance, a debit of $15,200, indicates that Sierra had $15,200 more increases than decreases in cash. That is, since it started with a balance of zero, it has $15,200 in its Cash account.

receipt of cash payment of cash. debits credits errors

Dividends result in a reduction of the? Because dividends _________ stockholders' equity, increases in the Dividends account are recorded with ________. As shown in Illustration 3.13, the Dividends account normally has a _____ balance.

stockholders' claims on retained earnings. reduce debits debit

Common stock is issued to investors in exchange for the? The Common Stock account is increased by _________ and decreased by _________. For example, when cash is invested in the business, Cash is _________ and Common Stock is ___________. The effects of debits and credits on the Common Stock account are shown in Illustration 3.9.

stockholders' investment. credits debits debited credited

Each transaction must affect ___ __ ____ __________ to keep the basic accounting equation in balance. In other words, for each transaction, debits must equal _______. The equality of debits and credits provides the basis for the _________-_________ ________________ ________.

two or more accounts credits double-entry accounting system

We use the terms debit and credit repeatedly in the recording process to describe? For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.

where entries are made in accounts.

Commonly abbreviated as Dr. for _____ and Cr. for ______.

debit credit

The term _____ indicates the left side of an account, and ______ indicates the right side.

debit credit

Retained earnings is?

net income that is retained in the business.

Debit and Credit do ___ mean increase or decrease, as is commonly thought.

not

In its simplest form, an account consists of three parts:? Because the alignment of these parts of an account resembles the letter T, it is referred to as a _-__________. The basic form of an account is shown in Illustration 3.5. ~Illustration 3.5 - Basic form of account We use this form of account often throughout this text to explain basic accounting relationships. Note the position of the debit side and credit side in Illustration 3.5.

(1) the title of the account, (2) a left or debit side, and (3) a right or credit side. T-account

Double-entry system? This system provides a logical method for? The double-entry system also helps to ensure the ________ of the recorded amounts and helps to detect errors such as those at MF Global as discussed in the Feature Story.

A system that records the two-sided effect of each transaction in appropriate accounts. recording transactions. accuracy

Account

An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue, or expense items.

VERY IMPORTANT! DO IT!2Debits and Credits for Balance Sheet Accounts Kate Browne, president of Hair It Is Inc., has just rented space in a shopping mall for the purpose of opening and operating a beauty salon. Long before opening day and before purchasing equipment, hiring assistants, and remodeling the space, Kate was strongly advised to set up a double-entry set of accounting records in which to record all of her business transactions. Identify the balance sheet accounts that Hair It Is Inc. will likely need to record the transactions necessary to establish and open for business. Also, indicate whether the normal balance of each account is a debit or a credit. ACTION PLAN •First identify asset accounts for each different type of asset invested in the business. •Then identify liability accounts for debts incurred by the business. •Hair It Is Inc. needs only one stockholders' equity account, Common Stock, when it begins the business. The other stockholders' equity account, Retained Earnings, will be needed after the business is operating.

Solution Hair It Is Inc. would likely need the following accounts in which to record the transactions necessary to establish and ready the beauty salon for opening day: Cash (debit balance); Equipment (debit balance); Supplies (debit balance); Accounts Payable (credit balance); Notes Payable (credit balance), if the business borrows money; and Common Stock (credit balance).

T-account

The basic form of an account.

Debit

The left side of an account.

Credit

The right side of an account.

An ___________ is an individual accounting record of increases and decreases in a specific asset, liability, stockholders' equity, revenue, or expense item. For example, Sierra Corporation has separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.)

account

Rather than using a tabular summary like the one in Illustration 3.4 for Sierra Corporation, an accounting information system uses ____________.

accounts.

A dividend is a distribution by a corporation to its stockholders. The most common form of distribution is a?

cash dividend.

Dr./Cr. Procedures for Stockholders' Equity Recall that stockholders' equity is comprised of two parts:? In the transaction events earlier in this chapter, you saw that revenues, expenses, and the payment of dividends affect retained earnings. Therefore, the subdivisions of stockholders' equity are?

common stock and retained earnings. common stock, retained earnings, dividends, revenues, and expenses.

Credits to revenue accounts should exceed debits; debits to expense accounts should exceed credits. Thus, revenue accounts normally show _____ balances, and expense accounts normally show _____ balances. The normal balances may be diagrammed as in Illustration 3.15. ~ILLUSTRATION 3.15 Normal balances-revenues and expenses

credit debit

Retained Earnings is increased by __________ (for example, by net income) and decreased by _________ (for example, by a net loss), as shown in Illustration 3.11.

credits debits

When comparing the totals of the two sides (credit and debit sides), an account shows a _____ __________ if the total of the debit amounts exceeds the credits. An account shows a ______ ________ if the credit amounts exceed the debits.

debit balance credit balance

Asset accounts normally show _______ ___________. That is, debits to a specific asset account should exceed credits to that account. Likewise, liability accounts normally show ________ __________. That is, credits to a liability account should exceed debits to that account. The normal balances may be diagrammed as in Illustration 3.8. ~Illustration 3.8 Normal balances-assets and liabilities Knowing which is the normal balance in an account may help when you are trying to identify ______. The normal balance is the side where ___________ in the account are recorded. For example, a credit balance in an asset account, such as Land, or a debit balance in a liability account, such as Salaries and Wages Payable, usually indicates errors in recording. Occasionally, however, an abnormal balance may be correct. The Cash account, for example, will have a credit balance when a company has overdrawn its bank balance by spending more than it has in its account. In automated accounting systems, the computer is programmed to flag violations of the normal balance and to print out error or exception reports. In ___________ _________, careful visual inspection of the accounts is required to detect normal balance problems.

debit balances. credit balances. errors. increases manual systems

A dividend is a?

distribution by a corporation to its stockholders.

International Note Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the ________-_____ ________________ ______ is the basis of accounting systems worldwide.

double-entry accounting system

Under the ___________-_____ ______, the two-sided effect of each transaction is recorded in appropriate accounts.

double-entry system

If every transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must _____ the sum of all the credits. The double-entry system for determining the equality of the accounting equation is much more efficient than the plus/minus procedure used earlier.

equal

When a company recognizes revenues, stockholders' equity is ____________. Revenue accounts are increased by _________ and decreased by ________.

increased. credits debits