27 views1 pages
28 Oct 2010
School
Course
Professor
Chapter 3
Debits and Credits
Debit=left, credit=right. Debiting means inserting an amount on the left side, crediting means inserting
an amount on the right side. The equality of debits and credits is the basis for the double-entry
accounting system, in which the dual effect of each transaction is recorded in appropriate accounts.
Asset accounts normally have a debit balance. Therefore, a debit entry would increase the account and a
credit entry would decrease the account.
Liability and equity accounts normally show credit balances. Therefore, a credit entry would increase the
account and a debit entry would decrease the account. Equity accounts are more difficult as they have a
variety of accounts. The five main equity accounts include common shares, dividends, revenue, expense,
retained earnings. Common shares, revenue and retained earnings move in the general equity
description, whereas dividends and expenses are more similar to asset accounts.
Steps in the Recording Process
The basic steps in the recording process are:
1. Analyze each transaction for its effect on the accounts
2. Enter the transaction information in a general journal (book of original entry)
3. Transfer the information from the general journal to the appropriate accounts in the general
ledger (book of accounts)
Evidence of the transaction comes from a source document, providing objectivity.
The Journal
Transactions are first recorded in chronological order in a journal and then transferred to the accounts.
For this reason, the journal is referred to as the book of original entry. Companies may use various kinds
of journals, but every company has a general journal. The general journal makes several contributions to
the recording process:
1. It discloses the complete effect of a transaction in one place, including an explanation and,
where applicable, identification of the source document
2. It provides a chronological record of transactions
3. It helps to prevent and locate errors, because the debit and credit amounts for each entry can
be quickly compared
Entering transaction data in the general journal is called journalizing. Note that journalizing must have
the total debit and credits equalling each other.
www.notesolution.com
Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Debiting means inserting an amount on the left side, crediting means inserting an amount on the right side. The equality of debits and credits is the basis for the double-entry accounting system, in which the dual effect of each transaction is recorded in appropriate accounts. Therefore, a debit entry would increase the account and a credit entry would decrease the account. Liability and equity accounts normally show credit balances. Therefore, a credit entry would increase the account and a debit entry would decrease the account. Equity accounts are more difficult as they have a variety of accounts. The five main equity accounts include common shares, dividends, revenue, expense, retained earnings. Common shares, revenue and retained earnings move in the general equity description, whereas dividends and expenses are more similar to asset accounts. Evidence of the transaction comes from a source document, providing objectivity. Transactions are first recorded in chronological order in a journal and then transferred to the accounts.

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
Booster Classes
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
Booster Classes