2-1

Lecture 2

ACCOUNTING PROCESS
ANALYSIS

2-2

Tools of The Recording Process

Debits and Credits

Journal Entries

Ledger Accounts

2-3

First, however, lets look at...

The
Accounting
Cycle

2-4

Steps in The Accounting Cycle

Analyze
source
documents.

Journalize
transactions
in the general
journal.

Post entries to
the accounts
in the general
ledger.

Prepare a trial
balance.

Prepare financial
statements.

Lets start with

The General Ledger Account
A ledger account is a tool used for
classifying and summarizing information
about increases, decreases, and
balances of financial statements items.

Think of it as a storage
container like a bucket.

Dollars, which are used to measure

economic transactions, are poured into
and out of the container.

2-5

Two General Ledger Account

Formats

Three-Amount Column Format

(Debit, Credit, Balance)

Used in general ledgers in the business

world

T-Account Format

Used primarily for teaching and analysis

of complex transactions

2-6

2-7

General Ledger Account

Three-Amount Column Format

ACCOUNT NAME:
Date

Description

ACCOUNT No.
1
2
3
PR

Debit

Credit

Balance

General Ledger Account

T-Account Format
For the sake of
simplicity, we
often use this
format in teaching
accounting even
though it is no
longer used in
practice.

Account Name
Debit

Credit

2-8

2-9

The T-Account
Increases to the
T-account are
recorded on
one side of the
T-account, and
decreases are
recorded on the
other side.

Account Name
Debit

Credit

2-10

The T-Account
The side which
increases and
the side which
decreases is
determined by
the type of
account.

Account Name
Debit

Credit

2-11

What Are Debits and Credits?

Tools used for recording transactions

Debit (DR)
Credit (CR)

Debit refers to the LEFT and Credit to

the RIGHT side of the T-Account.
Debit and Credit are neutral terms and
do not connote value judgments.
Neither is good or bad!

2-12

What Are Debits and Credits?

Tools used for recording transactions

Debit (DR)
Credit (CR)

Debit refers to the LEFT and Credit to

the RIGHT side of the T-Account
Account Name

LEFT

RIGHT

2-13

What Are Debits and Credits?

Tools used for recording transactions

Debit (DR)
Credit (CR)

Debit refers to the LEFT and Credit to

the RIGHT side of the T-Account
Account Name

LEFT

Used as
Adjectives:

DEBIT
SIDE

RIGHT

CREDIT
SIDE

2-14

What Are Debits and Credits?

Tools used for recording transactions

Debit (DR)
Credit (CR)

Debit refers to the LEFT and Credit to

the RIGHT side of the T-Account
Account Name

LEFT

Used as
Verbs:

DEBIT

RIGHT

CREDIT

Synonym
for Debit?

2-15

Names of Ledger Accounts

There are no magic names for many

accounts

e.g., either Heat, Light & Power or

Utilities Expense could be used for an
account name.

Other accounts have names which

must be used

e.g., Cash, Accounts Receivable and

Accounts Payable.

2-16

Types of Ledger Accounts

Lets see how

debits and
credits affect
the different
types of
accounts.

Account Name
Debit

Credit

2-17

Types of Ledger Accounts

Assets
Assets (A)
(A)

Liabilities
Liabilities (L)
(L)

Stockholders
Stockholders Equity
Equity (OE)
(OE)

Revenues
Revenues (R)
(R)

Expenses
Expenses (E)
(E)

2-18

Using Debits and Credits

Again, debits and credits are used to

increase or decrease account balances.

Determining whether to use a debit or

credit to record an increase or decrease
depends on the type of account in
question.

The Balance Sheet equation is the basis

for the determination.

Balance Sheet Model

(Revisited)

A = L + OE

2-19

2-20

Balance Sheet Model

(Revisited)
Assign
Assign aa T-Account
T-Account to
to each
each element
element of
of the
the
Balance
Balance Sheet
Sheet Model
Model

A = L + OE
Account Name

Debit

Credit

Account Name

Account Name

Debit

Debit

Credit

Credit

2-21

Balance Sheet Model

(Revisited)
Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + OE
Account Name

Debit

Credit

Account Name

Account Name

Debit

Debit

Credit

Credit

2-22

Balance Sheet Model

(Revisited)
Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + SE
ASSETS
Debit
Credit
for
for
Increase Decrease

Account Name

Account Name

Debit

Debit

Credit

Credit

2-23

Balance Sheet Model

(Revisited)
Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + SE
ASSETS

LIABILITIES

Debit
Credit
for
for
Increase Decrease

Debit
Credit
for
for
Decrease Increase

Account Name

Debit

Credit

Balance Sheet Model

(Revisited)

2-24

Debits
Debits and
and credits
credits affect
affect the
the Balance
Balance Sheet
Sheet
Model
Model as
as follows:
follows:

A = L + OE
ASSETS

LIABILITIES

EQUITIES

Debit
Credit
for
for
Increase Decrease

Debit
Credit
for
for
Decrease Increase

Debit
Credit
for
for
Decrease Increase

Stockholders Equity (OE)

2-25

A Closer Look
Recall
Recall that
that Stockholders
StockholdersEquity
Equity consists
consists
of
of the
the following
following components:
components:

Capital Stock + Retained Earnings

C + R/E

Stockholders Equity
A Closer Look
Therefore,
Therefore, the
the Capital
Capital and
and Retained
Retained
Earnings
Earnings accounts
accounts are
are affected
affected in
in the
the
following
following manner
manner by
by debits
debits and
and credits
credits
because
because they
they are
are part
part of
of Stockholders
Stockholders
Equity:
Equity:
CAPITAL STOCK

RET. EARNINGS

Debit
Credit
for
for
Decrease Increase

Debit
Credit
for
for
Decrease Increase

2-26

Stockholders Equity
A Closer Look
Also,
Also, because
because Revenue
Revenue accounts
accounts increase
increase
Stockholders
StockholdersEquity,
Equity,they
they are
are affected
affected by
by
debits
debits and
and credits
credits as
as follows:
follows:

REVENUES
Debit
Credit
for
for
Decrease Increase

2-27

Stockholders Equity
A Closer Look
And
And because
because Expense
Expense accounts
accounts decrease
decrease
Stockholders
StockholdersEquity,
Equity,they
they are
are affected
affected by
by
debits
debits and
and credits
credits as
as follows:
follows:

EXPENSES
Debit
Credit
for
for
Increase Decrease

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2-29

Normal Balances
Each of the 5 account types also has a
normal balance side. It is always the
side which is used to record increases
in the account.

2-30

Normal Balances
The normal balances for each of the FIVE
types of accounts are as follows:
Account Name
Debit Balance

Assets
Expenses

Credit Balance

Liabilities
Stockholders
Equity