Financial Accounting 1: Lesson 4
Account
an individual accounting record of increases and decreases in a specific asset, liability or owner's equity item.
General journal records
-date -accounts affected -the amounts of debits and credits
Recording process
1. Date entered in the date column 2. The name of account debited is entered against the left margin of the account titles and explanation column. 3. the amount to be debited to each account is entered in the debit amount column on the same line as the account name. 4. the name of the account to be credited is entered on the line immediately below the account to be debited and is intended to distinguish the account credited from the account (s) debited. 5. The account to be credited is entered in the credit amount column on the same line as the account name 6. A brief explanation of the transaction is entered on the line immediately below the journal entry. 7. A single line is usually left blank between each journal entry or a line is drawn between each entry across the particulars column.
Why Trial balance
1. Its primary purpose is to prove the mathematical equality of debits and credits after posting. 2. It uncovers errors in journalizing and posting. 3. It is useful in the preparation of financial statements.
Credit vs debit balance
Account has debit amount if the amount of debit exceed the credit amounts. and vice versa
The effects of debit and credit
Accounts Debits Credits Normal Balance Assets Increase Decrease Debit Liabilities Decrease Increase Credit
Preparing trial balance
Accounts with debit balances. Assets, drawing and expenses credit accounts in credit on the right. liability, equity and revenue. All are totalled and they are in balance.
T-account
DR on the left. Cr on the right. Consist on 3 parts. Title. Dr and Cr side
owner's drawings
Drawings is debited when owner's investment in the business is reduced.
Debits equal credits
Each transaction must affect 2 or more accounts affected. In order to balance the accounting equation.
Debit
Entered on the left side if: Increases in asset Decreases in liability and owner's equity
Credit
Entered on the right side if: Decrease assets Increase liability Increase owner's equity
Recording Dr. Owner's equity
Increase drawings. Increase expenses
Recording cash
Increases in cash are credited as debits and the decreases in cash are recorded as credits.
Recording Cr. for owner's equity
Increases owner's capital (investments) Increase revenues.
Debit
Left. Entry on the left side the transaction is debited.
Journal
Provides in one place a complete record of all transactions as they occur in chronological order. Must balance! credits=debits
Credit
Right. Entry of the left side the transaction is crediting.
Chart of accounts
The ledger is typically arranged in the numeric order of the chart of accounts. In turn, the chart of accounts numeric order in chart of accounts starts with the permanent accounts appearing in the balance sheet accounts, starting with assets.
Example
Transaction On September 4, 2008, Fesmire pays $3,000 cash to a creditor in full payment of the balance due. Basic Analysis The liability Accounts Payable is decreased $3,000 and, the asset Cash is decreased $3,000 Debit-Credit Analysis Debits decrease liabilities. Therefore debit Accounts Payable, $3,000. Credits decease assets. Therefore credit Cash, $3,000.
Trial balance
a list of accounts (listed in chart of accounts numerical order) and their balances at a given point in time.
The process of analyzing transactions
a) identify which accounts are affected b) Identify the accounts (assets, liability or equity) c) Identify whether the accounts need to be increased or decreased. d) Identify whether the accounts involved need to be debited or credited.
Liability accounts
show credit accounts (normal balance/ credit increases)
Assets accounts
show debit balances. (normal balance/ debit for increase.
Journal to ledger: Posting
the process of transferring journal entries to the ledger accounts. The following steps are used in posting: