MGMT 101 - Chapter 3 The Double-Entry Framework

How to remember when debits/credits increase or decrease certain accounts?

: Looking at the accounting equation and noting that assets are on the left side of the equal sign - they increase on the left (debit) side, liabilities and owner's equity are on the right side of the equal sign - they increase on the right (credit) side

Can credits both increase and decrease the balances of specific accounts?

Credits may increase or decrease the balances of specific accounts

Can debits both increase and decrease the balances of specific accounts?

Debits may increase or decrease the balances of specific accounts

What is double-entry accounting?

Due to the fact that every business transaction always has a dual effect upon the accounting elements (i.e. an increase or decrease in any asset, liability, owner's equity, revenue, or expense was always accompanied by an offsetting change within the basic accounting elements)

Is the trial balance a formal statement?

Formal statements include the income statement, statement of owner's equity, balance sheet and statement of cash flow, the trial balance is not a formal statement and does not require dollar signs

What side of the T-account are the following accounts increased on Assets (i.e., what side is their normal balance?)

Left-hand side (debit)

What side of the T-account are the following accounts increased on Drawing (i.e., what side is their normal balance?)

Left-hand side (debit)

What side of the T-account are the following accounts increased on Expenses (i.e., what side is their normal balance?)

Left-hand side (debit)

What is a trial balance?

List of all accounts showing the title and balance of each account that allows the determination of equality of the debits and credits through totaling of the debit side and comparing it to a totaling of the credit side

How to remember when debits/credits increase or decrease elements of owner's equity?

Revenues are increases to owner's equity so they go on the side where increases occur for owner's equity, the credit (right) side, and expenses and withdrawals (drawing) are decreases to owner's equity so they go on the side where decreases occur for owner's equity, the debit (left) side

What side of the T-account are the following accounts increased on Liabilities (i.e., what side is their normal balance?)

Right-hand side (credit)

What side of the T-account are the following accounts increased on Owner's Equity (i.e., what side is their normal balance?)

Right-hand side (credit)

What side of the T-account are the following accounts increased on Revenues (i.e., what side is their normal balance?)

Right-hand side (credit)

What is the normal balance for assets?

Since assets are debited for increases the left side of the T account

What is the normal balance for expense and drawing accounts?

Since expense and drawing accounts are debited for increases (reducing owner's equity) the left side of the T account

What is the normal balance for liabilities?

Since liabilities are credited for increases the right side of the T account

What is the normal balance for owner's equity?

Since owner's equity is credited for increases the right side of the T account

What is the normal balance for revenue accounts?

Since revenues are credited for increases (increasing owner's equity) the right side of the T account

What about remembering debits and credits on the revenue, expenses, and drawing account?

Since revenues increase owner's equity and expenses and withdrawals decrease owners equity just remember that a plus a plus is a plus and minus a minus is a plus, so if you want to increase owners equity increases occur on the same side that the owner's equity account increase (i.e., revenues are increased on the right-hand side of the T account) and if you want to decrease owners equity increases occur on the opposite side that the owner's equity account increases (i.e., expenses and withdrawals are increased on the left-hand side of the T account)

What is a T account?

The T account gets its name from the fact that it resembles the letter T

In a T account what is a balance?

The balance is the difference between the footings and is written on the side with the larger footing

In a T account do debits and credits have a "correct" side?

The debit is always on the left, and the credit is always on the right (this is true for all types of asset, liability, owner's equity, revenue, and expense accounts)

In a T account what is a footing?

The footing is the total of the dollar amounts of either the debit (left) or credit (right) side

What is a normal balance?

The side of an account that is used to increase the account

Why is the trial balance important when using the double-entry framework?

The two very important rules in double-entry accounting are the sum of the debits must equal the sum of the credits and the accounting equation must remain in balance, and a trial balance is prepared periodically to determine the equality of the debits and credits (i.e., is proof that in entering transactions, the total of the debits was equal to the total of the credits, and the accounting equation has remained in balance)

What is an easy way to remember what accounts get debited and credited for increases?

Think about the side they are on in the accounting equation (i.e., assets are on the left-hand side of the accounting equation so the left-hand side of the T account increases the account and liabilities and owner's equity are on the right-hand side of the accounting equation so the right-hand side of the T account increases the account)

What are the three major parts of the T account?

Title, debit (left side), credit (right side)

How is a T account balanced?

To determine the balance of a T account an individual must simply total the dollar amounts on the debit (left) and credit (right) sides

What does it mean to debit an account?

To enter an amount on the left (debit) side of the account

What does it mean to credit an account?

To enter an amount on the right (credit) side of the account

What are the steps in transaction analysis?

What happened, what accounts, how is the accounting equation affected

The accounts payable account is increased with a _____

credit

The accounts receivable account is decreased with a _____

credit

The asset account delivery equipment is decreased with a _____

credit

The cash account is decreased with a _____

credit

The owner's capital account is increased with a _____

credit

The revenue account "delivery fees" is increased with a _____

credit

The revenue account "professional fees" is increased with a _____

credit

The accounts payable account is decreased with a _____

debit

The accounts receivable account is increased with a _____

debit

The asset account "prepaid insurance" is increased with a _____

debit

The cash account is increased with a _____

debit

The expense account "rent expense" is increased with a _____

debit

The expense account "repair expense" is increased with a _____

debit

The office furniture account is increased with a _____

debit

The owner's drawing account is increased with a _____

debit

Liabilities account (account payable)

decrease - debit, increase - credit

Owner's equity account (owner's capital)

decrease - debit, increase - credit

Revenue account

decrease - debit, increase - credit

Assets account (cash, furniture, insurance, account receivable ...)

increase - debit, decrease - credit

Expenses account

increase - debit, decrease - credit

Withdraw account

increase - debit, decrease - credit