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Double-Entry Accounting

Double-Entry Accounting.

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Double-Entry Accounting

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  1. Double-Entry Accounting “ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance.” Scale or Balance T account Right Side Give CREDIT Left Side Receive DEBIT Luca Pacioli Developer of Double-Entry Accounting Give CREDIT Receive DEBIT

  2. Rules of Debit / Credit Income Statement Accounts Expense Accounts Revenue Accounts Debit for increases (+) Credit for decreases (-) Debit for decreases (-) Credit for increases (+)

  3. Income Statement Accounts Debits Credits Revenue accounts…… Decrease (-) Increase (+) Expense accounts…… Increase (+) Decrease (-)

  4. Payment of dividends

  5. JOURNAL Page 2 Post. Ref. Date Description Debit Credit 2005 Nov. 30 (H) On November 30, Net Solutions paid dividends of $2,000. 1 2 3 4 Dividends 2 000 00 Cash 2 000 00 Paid dividends to stockholders.

  6. (H) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use. Effects of this entry in the Ledger Cash Dividends Nov. 1 25,000 Nov. 5 25,000 Nov. 30 2,000 18 7,500 30 3,650 30 950 30 2,000

  7. Normal Balances of Accounts Increase (Normal Balances) Decreases Balance sheet accounts: Asset Debit Credit Liability Credit Debit Owners’ (Stockholders’) Equity: Capital Stock Credit Debit Retained Earnings Credit Debit Income statement accounts: Revenue Credit Debit Expense Debit Credit Dividend accounts: Dividends Debit Credit

  8. Transaction authorized Transaction takes place Document prepared 1 5 2 3 Entry recorded in journal Entry posted to ledger 4 Flow of Business Transactions

  9. System to Analyze Transactions 1.Determine whether an asset, a liability, owner’s equity, revenue, or expense account is affected by the transaction. 2.For each account affected by the transaction, determine whether the account increases or decreases. 3.Determine whether each increase or decrease should be recorded as a debit or a credit.

  10. Let’s see the example of JJ’s Lawn Care Service.

  11. Debit and Credit Entries Receipts are on the debit side. Payments are on the credit side. The balance is the difference between the debit and credit entries in the account.

  12. ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Debit and Credit Rules Debits and credits affect accounts as follows: A=L+OE

  13. Double Entry AccountingThe Equality of Debits and Credits A=L+OE = Debit balances Credit balances In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

  14. Let’s record selected transactions for JJ’s Lawn Care Service in the accounts.

  15. May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock. Will Capital Stock increase or decrease? Will Cash increase or decrease?

  16. Capital Stock increases $8,000 with a credit. Cash increases $8,000 with a debit. • May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.

  17. May 2: JJ’s purchased a riding lawn mower for $2,500 cash. Will Tools & Equipment increase or decrease? Will Cash increase or decrease?

  18. Tools & Equipment increases $2,500 with a debit. Cash decreases $2,500 with a credit. • May 2: JJ’s purchased a riding lawn mower for $2,500 cash.

  19. May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000. Will Cash and Notes Payable increase or decrease? Will Truck increase or decrease?

  20. Cash decreases $2,000 with a credit. Notes Payable increases $13,000 with a credit. Truck increases $15,000 with a debit. • May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.

  21. May 11: JJ’s purchased some repair parts for $300 on account. Will Tools & Equipment increase or decrease? Will Accounts Payable increase or decrease?

  22. Tools & Equipment increases $300 with a debit. Accounts Payable increases $300 with a credit. • May 11: JJ’s purchased some repair parts for $300 on account.

  23. May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days. Will Tools & Equipment increase or decrease? Will Accounts Receivable increase or decrease?

  24. Tools & Equipment decreases $150 with a credit. Accounts Receivable increases $150 with a debit. • May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.

  25. The Journal In an actual accounting system, transactions are initially recorded in the journal.

  26. End of Todays Session

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