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Chapters 1 and 2 are extremely important. Everything that is done in accounting is based
on the concepts in these two chapters. Be sure you read and understand them!
The T account form:
The T account for each of the classifications of accounts has an increase (+) and a decrease
() side.
The left side of an account is called the debit (Dr) and the right side is called the credit (Cr).
The normal balance of an account can be either a debit or credit. It all depends on the
accounts classification.
Every business transaction affects at least two accounts. The credits and debits must equal
for the accounts to be balanced.
The other important thing to remember is that the amount placed in one account on the debit
side MUST also be placed on the credit side in another account. This is the double-entry
accounting that we discussed in the last chapter!
Look at Debits and Credits not as Negatives and Positives, but rather as Increase and
Decreases!
The table below lists the normal balances of each classification of accounts. To use
Debits and Credits you must know: the Normal Balance of the accounts and what
increases and decreases the account. It is extremely important that you learn this! I am
not into a lot of memorization BUT this is something that you need to MEMORIZE!
Decrease
Debit
Credit
Credit
Debit
Credit
Debit
Credit
Debit
Debit
Credit
Debit
Credit
The Key to Adding and Subtracting Debits and Credits (Important to Remember)
Debit + Debit
Credit + Credit
Debit - Credit
****Add like items, subtract unlike items!
Compound Entry: this is a business transaction that involves more than one credit or more
than one debit. Look at the example on page 71.
The Trial Balance is used as a check to ensure that in recording transactions, the total of the
amounts placed on the debit sides of T accounts equals the total of the amounts placed on the
credit sides of T accounts.
List/record the accounts as they are listed in the chart of accounts and their balances.
You only have to list the accounts that have a balance, or you can list all of the accounts
regardless of whether they have a balance or not.
Sometimes the account numbers of each account will be listed to the left of the accounts. In
this case the accounts are listed in numerical order which should be the same as the chart of
accounts.
Review the key points (in red) of the Trial Balance in Figure 2 on page 75.
Always have a Heading on the Trial Balance.
Single underlining numbers means you are totaling the numbers.
Double underlining means that the column of numbers has been totaled and that the two
columns are balanced.
Again the Statement of Owners Equity is for the period of a month, quarter, or year. At the
end of each accounting year the figures in these accounts become zero and start over again.
The Balance Sheet is the third financial statement prepared.
It shows the condition or financial position of the business at a point in time.
It is a list of the assets, liabilities, and owners equity of the company. It is based on the
accounting equation.
The date is always as of the date the statement is prepared. It is considered to be continuous
since the assets and liabilities of the company do not go away each year.
The ending capital amount is carried over from the Statement of Owners Equity to the
Balance Sheet.
B
C
C
D
6.
7.
8.
9.
B
C
D
D
4
5. A