Bookkeeping Ch. 3

Trial Balance

A list of all accounts, showing the title and balance of each account, used to prove that the sum of the debits equals the sum of the credits.

Double-Entry Accounting

A system in which each transaction has a dual effect on the accounting elements.

Balance

The difference between the footings of an account. The amount is written on the side with the larger footing

Debit Balances

The normal balance of asset, expense, and drawing accounts

Credit Balances

The normal balance of liability, owner's equity, and revenue accounts.

Normal Balance

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

Footings

The total dollar amounts on the debit and credit sides of an account.

Assets

are on the left side of the accounting equation and so increase on the left side of the T equation (debit)

Liabilities and Owner's Equity

are on the right side of the accounting equation and so increase on the right side of the T equation (credit)

Transaction Analysis w/ T Accounts

ask the three main questions, determine the location of the account in the accounting equation or owner's equity umbrella, and determine whether each account should be debited or credited

Expenses

decrease owner's equity. Specific expense accounts such as rent, wages, advertising, and utilities are maintained and debited as expenses are incurred so that readers of financial statements can see the types of expenses incurred during the accounting period

The T Account

gets its name from the fact that it resembles this letter. The three major parts of this account are the title, the debit (the left side), and the credit (the right side)

Revenues

increase owner's equity. Specific revenue accounts are credited when revenue is earned because readers of financial statements like to see the specific types of revenues earned. Example of specific revenue accounts include delivery fees, service fees, and sales

Debit

left; where increases in cash are recorded; as verb to enter an amount on the left side of an account

Four Owner's Equity Accounts

owner's capital, revenues, expenses, and drawings

Owner's Capital Account

reports the amount the owner has invested in the business; this increases the owner's equity

Balance

requires that at least one debit and at least one credit for each transaction

Credit

right; where decreased in cash are recorded; as verb to enter an amount on the right side of an account

Owner's Equity Umbrella

the owner's equity account hovers over the revenue, expense, and drawing accounts. Revenue is showed on the credit side because it increases owner's capital. Expense and drawing accounts are shown on the debit side because they decrease the owner's equity

Drawing

withdrawals of cash and other assets by the owner for personal reasons that decrease the owner's equity. They are debited to this separate account so that readers of financial statements can know the amounts of withdrawals for the accounting period.

T Account Equation

Debits = credits for each transaction