2. The T Account format
Every business transaction involves both a
debit and a credit
There has to be at least one debit and one credit for every
transaction, and the debits have to equal the credits
Scale or Balance
Receive
DEBIT
Give
CREDIT
3. Debits and Credits
A business’ debits must equal their credits.
Applying this to the accounting equation, which states that a business’
assets must equal their liabilities and owner’s equity, shows how the
normal balances for the accounts are determined.
4. Increases and Decreases in the Accounts
The type of account determines how
increases and decreases are recorded in it:
Credit Debit Credit
+
Debit Debit Credit
+ - +
- -
Assets
Stockholders’
Equity
Liabilities
Accounting
Equation
Rules of
Debit and
Credit
= +
5. Debit for
increase
+
Credit for
Decrease
-
Debit for
Decrease
-
Credit for
Increase
+
Debit for
Decrease
-
Credit for
Increase
+
Debit for
Increase
+
Credit for
Decrease
-
Debit for
Increase
+
Credit for
Decrease
-
Assets Liabilities Common Stock
Retained Earnings
Dividends
Revenues
Expenses
Debit for
Decrease
-
Credit for
Increase
+
Debit for
Decrease
-
Credit for
Increase
+
= +
Expanded Rules of Debit and Credit
7. The Double - Entry Accounting
System
The process of entering the transactions of
the business into the accounting records
commences with the journal entry.
The journal entry is an accounting
representation of a business transaction or
an economic event.
8. Accountanese…
The journal entry uses debits and credits to record the
transaction and once the journal entry has been prepared it
is posted to the accounts.
To make the journal entry one enters the debit first, which
is always on the left hand side of the entry, and then the
credit which is on the right.
Debit (from its Latin origin) means “left.” It is often
abbreviated as “dr.”
Credit (from its Latin origin) means “right.” It is often
abbreviated as “cr.”
9. Recording Transactions in the Journal
Steps of the journalizing process
Identify the transaction from source documents,
such as bank deposit slips, sale receipts, and
check stubs
Specify each account affected by the transaction
and classify it by type (asset, liability,
stockholders’ equity, revenue, or expense)
10. Recording Transactions in the Journal
Determine whether each account is increased
or decreased by the transaction
Determine whether to debit or credit the
account to record its increase or decrease
Enter the transaction in the journal, including a
brief explanation for the entry
Enter the debit side first and the credit side next
11. Recording Transactions in the Journal
A complete journal entry includes
The date of the transaction
The title of the account debited (placed flush
left in the Accounts and Explanations column)
The title of the account credited (indented
slightly)
The currency amount of the debit (left)
The currency amount of the credit (right)
A short explanation of the transaction (not
indented)
12. Technique of journalizing
The date of the transaction is entered into the date column.
The debit account title is entered at the extreme left margin
of the Account Titles and Explanation column. The credit
account title is indented on the next line.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)
1 Computer Equipment 7,000
Cash 7,000
(Purchased equipment for
cash)
13. When three or more accounts are
required in one journal entry, the entry is
referred to as a compound entry.
Compound Journal Entry
2
1
3
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
July 1 Delivery Equipment 14,000
Cash 8,000
Accounts Payable 6,000
(Purchased truck for cash
with balance on account)
14. Posting to the General Ledger
Generally, in manual bookkeeping, the bookkeeper
makes journal entries, then posts the entries to a
ledger.
A ledger is a book that has each account on a
separate page. All of the amounts that affect that
account are entered there, and a running total is
kept.
15. An individual account is called a ledger.
A general ledger contains all the assets, liabilities,
and owner’s equity accounts.
GENERAL
LEDGER
The General Ledger
16. Cash……………………………..50,000
Common Stock……………. 50,000
Issued common stock to owners
Common Stock
Cash
50,000
50,000
Posting to the Ledger
Accounts and Explanation Debit Credit
Journal Entry
Journal Entry and Posting to the Ledger
17. The Flows of Accounting Data
Transaction
Occurs
Source
Documents
Prepared
Transaction
Analysis
Takes Place
Transaction
Entered in Journal
Amounts Posted
to Ledger
18. Consider again selected transactions of
Air & Sea Travel, Inc. - Transaction 1
Air & Sea Travel, Inc., received Rs.50,000 cash
and in turn issued common stock to the owners
Transaction
analysis
Journal
entry
Cash…………………………..50,000
Common Stock………… 50,000
Issued common stock to owners
Accounting
equation
Assets = Liabilities + Stockholders’ Equity
50,000 = 0 + 50,000
Ledger
Accounts
Common Stock
(1) 50,000 (1) 50,000
Cash
19. Air & Sea Travel, Inc. - Transaction 2
The business paid Rs. 40,000 for land
Transaction
analysis
Journal
entry
Land…………………………..40,000
Cash……………………. 40,000
Paid cash for land
Accounting
equation
Assets = Liabilities + Stockholders’ Equity
+40,000 = 0 + 0
-40,000
Ledger
Accounts
Land
Cash
(1) 50,000 (2) 40,000
(2) 40,000
20. The business purchased Rs.500 of office
supplies on account
Transaction
analysis
Journal
entry
Office supplies…………………500
Accounts payable……….. 500
Purchased office supplies on account
Accounting
equation
Assets = Liabilities + Stockholders’ Equity
+500 = +500 + 0
Ledger
Accounts
Accounts Payable
Office supplies
(3) 500 (3) 500
Air & Sea Travel, Inc. - Transaction 3
21. The business performed travel service for
clients and received cash of Rs.5,500
Transaction
analysis
Journal
entry
Cash…………………………..5,500
Service Revenue……… 5,500
Performed services for cash
Accounting
equation
Assets = Liabilities + Equity + Revenues
5,500 = 0 + 5,500
Ledger
Accounts
Service Revenue
Cash
(1) 50,000
(4) 5,500
(4) 5,500
(2) 40,000
Stockholders’
Air & Sea Travel, Inc. - Transaction 4
22. Accounts After Posting
(1) 50,000
(4) 5,500
(9) 1,000
(10) 22,000
Bal. 33,300
(2) 40,000
(6) 2,700
(7) 400
(11) 2,100
Cash
Each account has a balance, denoted as Bal.
This amount is the difference between the
account’s total debits and total credits
23. NetSolutions
A Sole Proprietorship
“ On November 1, 2012, I started a sole
proprietorship called NetSolutions. I plan to
use my knowledge of microcomputers and
offer computer consulting services for a fee.
The following double-entry transactions show
how amounts received (debits) always equal
amounts given (credits).”
Chris Clark,
Owner
24. Chris Clark
deposits $25,000
in a bank account
for NetSolutions.
Business Transactions
General Journal
receive
Debit
give
Credit
NetSolutions
(investee)
Chris Clark (investor)
give
Credit
Entry A.
Date Description Debit Credit
11/1
25. Chris Clark
deposits $25,000
in a bank account
for NetSolutions.
Business Transactions
General Journal
receive
Debit
give
Credit
NetSolutions
(investee)
Cash
Chris Clark (investor)
give
Credit
Entry A.
Date Description Debit Credit
11/1 Cash 25,000
26. Chris Clark
deposits $25,000
in a bank account
for NetSolutions.
Business Transactions
General Journal
Date Description Debit Credit
11/1 Cash 25,000
Chris Clark, Capital 25,000
receive
Debit
give
Credit
NetSolutions
(investee)
Cash A promise
to the owner
Chris Clark (investor)
give
Credit
Entry A.
27. NetSolutions buys
land for $20,000.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(buyer)
Land Owner (seller)
give
Credit
Entry B.
General Journal
Date Description Debit Credit
11/5
28. NetSolutions buys
land for $20,000.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(buyer)
Land
Land Owner (seller)
give
Credit
Entry B.
General Journal
Date Description Debit Credit
11/5 Land 20,000
29. NetSolutions buys
land for $20,000.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(buyer)
Land Cash
Land Owner (seller)
give
Credit
Entry B.
General Journal
Date Description Debit Credit
11/5 Land 20,000
Cash 20,000
30. NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(buyer)
Supplier (seller)
give
Credit
Entry C.
General Journal
Date Description Debit Credit
11/10
31. NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(buyer)
Supplies
Supplier (seller)
give
Credit
Entry C.
General Journal
Date Description Debit Credit
11/10 Supplies 1,350
32. NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(buyer)
Supplies
Supplier (seller)
give
Credit
Entry C.
A promise
to pay later
General Journal
Date Description Debit Credit
11/10 Supplies 1,350
Accounts Payable 1,350
33. NetSolutions
earns fees of
$7,500, receiving
cash.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(seller)
Customer (buyer)
give
Credit
Entry D.
General Journal
Date Description Debit Credit
11/18
34. NetSolutions
earns fees of
$7,500, receiving
cash.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(seller)
Cash
Customer (buyer)
give
Credit
Entry D.
General Journal
Date Description Debit Credit
11/18 Cash 7,500
35. NetSolutions
earns fees of
$7,500, receiving
cash.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(seller)
Cash
Customer (buyer)
give
Credit
Entry D.
Services
General Journal
Date Description Debit Credit
11/18 Cash 7,500
Fees Earned 7,500
36. Date Description Debit Credit
NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
Business Transactions
General Journal
receive
Debit
give
Credit
NetSolutions
(buyer)
Various suppliers
give
Credit
Entry E.
37. Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
Utilities Expense 450
Misc. Expense 275
NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
Business Transactions
General Journal
receive
Debit
give
Credit
NetSolutions
(buyer)
Services,
benefits
Various suppliers
give
Credit
Entry E.
38. Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
Utilities Expense 450
Misc. Expense 275
Cash 3,650
NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
Business Transactions
General Journal
receive
Debit
give
Credit
NetSolutions
(buyer)
Services,
benefits
Various suppliers
give
Credit
Entry E.
Cash
39. NetSolutions pays
$950 to creditors
on account.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(payor)
Supplier (payee)
give
Credit
Entry F.
General Journal
Date Description Debit Credit
11/30
40. NetSolutions pays
$950 to creditors
on account.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(payor)
Reduction in
obligation
Supplier (payee)
give
Credit
Entry F.
General Journal
Date Description Debit Credit
11/30 Accounts Payable 950
41. NetSolutions pays
$950 to creditors
on account.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(payor)
Reduction in
obligation
Supplier (payee)
give
Credit
Entry F.
Cash
General Journal
Date Description Debit Credit
11/30 Accounts Payable 950
Cash 950
42. At the end of the
month, the cost of
supplies on hand
is $550.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(user)
Internal Transaction
(no external entity)
give
Credit
Entry G.
General Journal
Date Description Debit Credit
11/30
43. At the end of the
month, the cost of
supplies on hand
is $550.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(user)
Use of
supplies
Internal Transaction
(no external entity)
give
Credit
Entry G.
General Journal
Balance of Supplies account $1,350 less $550 on hand = $800 used
Date Description Debit Credit
11/30 Supplies Expense 800
44. At the end of the
month, the cost of
supplies on hand
is $550.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(user)
Use of
supplies
Internal Transaction
(no external entity)
give
Credit
Entry G.
Supplies
General Journal
Date Description Debit Credit
11/30 Supplies Expense 800
Supplies 800
Balance of Supplies account $1,350 less $550 on hand = $800 used
45. Chris Clark
withdraws $2,000
in cash.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(payor)
Chris Clark (payee)
give
Credit
Entry H.
General Journal
Date Description Debit Credit
11/30
46. Chris Clark
withdraws $2,000
in cash.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(payor)
Reduction in
obligation
Chris Clark (payee)
give
Credit
Entry H.
General Journal
Date Description Debit Credit
11/30 Chris Clark, Drawing 2,000
47. Chris Clark
withdraws $2,000
in cash.
Business Transactions
receive
Debit
give
Credit
NetSolutions
(payor)
Reduction in
obligation
Chris Clark (payee)
give
Credit
Entry H.
Cash
General Journal
Date Description Debit Credit
11/30 Chris Clark, Drawing 2,000
Cash 2,000
49. 1. Transactions are analyzed
and recorded in journal.
Documents
Journal
Journal, Ledger, Trial Balance
50. 1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal Ledger
Journal, Ledger, Trial Balance
51. 1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal Ledger
3. Trial balance is prepared.
Journal, Ledger, Trial Balance
Trial Balance
52. The Trial Balance
At any time during the month, but usually at the end of
the month (or accounting period) one can prepare a
trial balance. A trial balance is just a list of accounts in
chart-of-accounts order with their balances-to-date
On a trial balance, there are two columns of numbers,
debits and credits. all of the debits go in the left-hand
column (debit columns) and credits in the credit
column.
They have to equal each other.
53. The Trial Balance
• The Trial Balance is a list of accounts and their balances at a
given time.
• The primary purpose of a trial balance is to prove debits =
credits after posting.
• If debits and credits do not agree, the trial balance can be used
to uncover errors in journalizing and posting.
56. Income
Statement
NetSolutions
Trial Balance
November 30, 2012
11 Cash 5,900
14 Supplies 550
17 Land 20,000
21 Accounts Payable 400
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
52 Rent Expense 800
54 Utilities Expense 450
55 Supplies Expense 800
59 Miscellaneous Expense 275
32,900 32,900
57. Correcting Accounting Errors
If total debits and total credits on the trial balance
are not equal, then accounting errors exist
Reason(s) behind many of the out-of-balance
conditions can be detected by computing the
difference between debits and credits on the trial
balance and performing one or more of the
following actions . . .
58. Search the trial balance for a missing account
Search the journal for the amount of the difference
Divide the difference between total debits and
total credits by 2. A debit treated as a credit, or
vice versa, doubles the amount of the error
Divide the out-of-balance amount by 9. If the
result is evenly divisible by 9, the error may be a
slide (writing Rs. 61 as Rs. 610) or a transposition
(writing Rs. 61 as Rs.16)
Correcting Accounting Errors…
59. Check..
OGL Petrol station opened their new store
in Gothapatna and purchased 20000 litres
from HPCL at Rs 50 per litre. Vehicles
visiting the gas station made a sale of
about 16000 litres at Rs 75 each. End of
the month it found that it had 2200 litres
in the underground tank. It also appointed
a refill person for the month for a salary of
Rs 5000. What is OGL’s profit?
