You are on page 1of 8

The Account

An account is an accounting record of increses & decreases in a specific asset,libility,or owners equity item. There are separate accounts like as accounts receivable, accounts payable, service revenue, & salaries expense.An account consists of 3 parts : A titel of the account. A left or debit side. A right or credit side.

Dabits & Credits Debit indicates left , & credit indicates right. They
indicate which side of a T account a number will be recorded on. Entering an amount on the left side of an account is called debiting the account , making an entry on the right side is crediting the account.We can shortly write debit as Dr. & credit as Cr. Title account Cash Capital 1000 1000 Dr. Cr.

Assets & Liabilities


Both side of the accounting equation (assets = liabilities + owners equity) must be equal. It follows , then, that we must record increases & decreases in assets opposite from each other.

Debits
Increase assets Decrease liabilities

Credits
Decrease asset Increase liabilities

Debites to a specific assets account should exceed the credits to that account.credits to a liability account should exceed debits to that account. The normal balance of an account is on the side where an increase in the account is recorded. Owners Equity Owners investments & revenues increase owners equity. Owners drawing & expenses decrease owners equity. Owners capital Investment by owners is credited to the owners capital account. Credits increase this account & debits decrease it. For example, when an owner invests cash in the business, the company debits (increase) cash & credits (increases) owners capital. When the owners investment in the businesses reduced, owners capital is debited (decreased). Debits Decrease owners capital Credits Increase owners capital (Normal balance) Owners Drawing An owner may withdraw cash or other assets for personal use. Withdrawals could be debited directly to owners capital to indicate a decrease in owners equity. However, it is preferable to use a separate account called owners drawing. Debits Increase owners drawing (Normal balance) Credits Decrease owners drawing

Revenue & Expenses: The purpose of earning revenues isto benefits the owners of the business. When a company earns revenues owners equity increases. Therefore the effect of debits & credits on revenue accounts the same as their effect on owners capital. Revenue accounts are increased by credits & decreased by debits. Expenses have the opposite effect: expenses decrease owners equity. Since expenses decrease net income, & revenues increase it.

Debits
Decrease revenues Increase expenses

Credits
Increase Revenues Decrease expenses

Recoding Process
There are 3 basic steps in recoding process. And they are given bellowAnalyze each transaction for its effects on the account. Enter the transaction information in a journal. Transfer the journal information to the appropriate accounts in the ledger. Although it is possible to enter transaction information directly into the accounts without using a journal, few businesses do so.

The Journal
Companies initially record transaction in chronological order. Thus the journal is referred to as the book of original entry. For each transaction

the journal shows the debit & credit effects on specific accounts. Company may use various kinds of journal, but every company has the most basic from of journal it is called a General Journal. The journal makes several significant contributions to the recoding process: It discloses in one place the complete effect of a transaction. It provides a chronological record of transactions. It helps to prevent or locate errors because the debit & credit amounts for each entry can be easily compared. Journalizing Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for each transaction. A complete entry consists of: The date of the transaction. The accounts & amounts to be debited & credited. A brief explanation of the transaction.

GENERAL JOURNAL
Date 2008 Sep.1 Title & explanation Cash Capital (invest cash in business) Ref Dr. 10000 Cr. 10000

Simple & compound entries Soma entries involve only two accounts one debits & one credit. An entry like these is considered a simple entry. Some transactions however require more than two accounts in journalizing. An entry that requires three or more accounts is called compound entry.

Date Title & explanation 2008 Delivery equipment Oct.1 Cash Accounts Payable (Purchased truck for cash with balance on account)

Ref Dr. Cr. 1500 700 800

The Ledger
The entrie group of accounts maintaind by a company is the ledger. Company may use various kinds of ledgers but every company has a genaral ledger. A general ledger containts all the asset, libility, & owners equity accounts. Company arrange the ledger in the sequince in whice they present the accounts in the financial statements beginning with the balance sheet accounts.

Individual asset accounts

Individual libility

Individual owners equity

Equipement Land Supplies Cash

Interest Payable Salaries Payable Accounts Payable Notes payable

Salaries Expense Service Revenue J.Lind Drewing J.Lind Capital

Posting
Transfering journal entries to the ledger accounts is called posting. This phase of the recording process accumulates the effect\s of journalized transaction into the individul accounts. Posting involves the following steps : In the ledger entry in the appropriate columns of the accounts debited the date journal page & debit amount shown in the journal. In the reference column of the journal write the account number to whice the debit amount was posted. In the ledger enter in the appropriate columns of the accounts credited the date journal page & credit amount shown in the journal. In the reference column of the journal write the account number to whice the credit amount was posted. Posting should be performed in chronological order. That is the company should post all the debits & credits of one journal entry befor proceeding to the next journal entry. Posting should be made on a timely basis to ensure that the ledger is up to date. The Trial Balance A trial balance is a list of accounts & their balance at a given time. Company perpare a trial balance at the end of an accounting period.The primary purpose of a trial balance is to prove that the debits equal the credits after posting. The sum of the debit balances in the trial balance should equil the sum of the credit balance. If the debits & credits do not agree the company can use the trial balance to erroes in journalizing & posting.

The steps for preparing a trial balance are List the account titels & their balances. Total the debit & credit columns. Prove the equality of the two clumns.

Trial Balance

Titel Cash Advertising supplies Notes Payable Unearned Revenue Rent Expenses Drawing

Dr. 1000 500

Cr.

900 200 600 1000 2100 2100

Limitation Of Trial Balance : A trial Balance does not guarantee freedom feom recording errors. Numerous errors may exist even through the balance columns agree.For example the trial balance may balance even when 1) A transaction is not journalized. 2) A correct journal entry is not posted. 3) A journal entry is posted twice. 4) Incorrect accounts are used in journalizing or posting. 5) Offseting errors are made in recording the amount of a trancation.

You might also like