Fundamentals Of Accounting: Part 2: Chapter 2 Notes For Test
Double-Entry Accounting
Debits and Credits A T-account represents a ledger account and is used to show the effects of transactions. Its name comes from its shape like the letter T. The layout of a T-account is shown in Exhibit 2.5. Exhibit 2.5: The T-Account Account Title (Left side) (Right side) Debit Credit The left side of an account is called the debit side, or Dr. The right side is called the credit side, or Cr. The enter amounts on the left side of an account is to debit the account. To enter amounts on the right side is to credit the account. The term debit or credit, by itself, does not mean increase or decrease. Whether a debit or credit is an increase or decrease depends on the account. Point: Debit and credit are accounting directions for left and right. The difference between total debits and total credits for an account, including any beginning balance, is the account balance. When total debits exceed total credits, the account has a debit balance. It has a credit balance when total credits exceed total debits. When total debits equal total credits, the account has a zero balance.
Double-Entry System
Double-entry accounting demands the accounting equation remain in balance, which means that for each transaction: At least two accounts are involved, with at least one debit and one credit. The total amount debited must equal the total amount credited. "Total debits equal total credits for each entry." This means total debits must equal total credits for all entries, and total debit account balances in the ledger must equal total credit account balances. The system for recording debits and credits follows the accounting equation-see Exhibit 2.6. Exhibit 2.6: Debits and Credits in the Accounting Equation Assets: Debit for increases (+) Normal, Credit for decreases (-) = Liabilities: Debit for decreases (-), Credit for increases (+) Normal + Equity: Debit for decreases (-), Credit for increases (+) Normal Net increases or decreases on one side have equal net effects on the other side. For example, a net increase in assets must include an equal net increase on the liabilities and equity side. Some transactions affect only one side of the equation, such as acquiring a land asset by giving up a cash asset, but their net effect on this one side is zero. Point: Assets are on the left-hand side of the equation and thus increase on the left. Liabilities and equity are on the right-hand side of the equation and thus increase on the right. The left side is the normal balance side for assets; the right side is the normal balance side for liabilities and equity. This matches their layout in the accounting equation, where assets are on the left side and liabilities and equity are on the right. Equity increases from revenues and owner investments, and it decreases from expenses and owner withdrawals. We see this by expanding the accounting equation to include debits and credits in double-entry form. Increases (credits) to owner's capital and revenues increase equity; increases (debits) to withdrawals and expenses decrease equity. The normal balance of each account is the side where increases are recorded. The T -Account for FastForward's cash account, reflecting its first 11 transactions. The total increases (debits) in its Cash account are $36,100, and the total decreases (credits) are $31,300. Total debits exceed total credits by $4,800, resulting in its ending debit balance of $4,800. Point: DrEAD means debit (Dr) is the normal balance side for Expense, Asset, and Drawing accounts; credit the others. Point: The ending balance is on the side with the larger dollar amount.
Analyzing and Processing Transactions
Journalizing and Posting Transactions
