Chapter 4 Double Entry Accounting

Chapter 4 Double Entry Accounting - CHAPTER THE...

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Assets Debit + Credit - = + Claims Liabilities Equity Debit - Debit - Credit + Credit + CHAPTER four THE DOUBLE-ENTRY ACCOUNTING SYSTEM Debit/Credit Terminology T-Account – Simplified account form, named for its shape, with the account title placed at the top of a horizontal bar, debit entries listed on the left side of the vertical bar, and credit entries shown on the right side. Debit – Entry that increases assets account or decreases liability and equity accounts. Credit – Entry that increases liability and equity accounts or decreases asset accounts. Account Balance – Difference between total debits and total credits in an account. Double-Entry Accounting – Method of keeping records that provides a system of checks and balances by recording transactions in a dual format. Total debts always equal total assets. The rules of debits and credits are summarized as follows: 1. Debits increase asset accounts; credits decrease asset accounts. 2. Debits decrease liability and stockholders’ equity accounts; credits increase liability and stockholders’ equity accounts. Transactions
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Asset 1 Assets Asset 2 = Claims Debit + Credit Debit Credit - Asset Source Transactions – A business may obtain assets from three primary sources: 1. Stockholders 2. Creditors 3. Through operating activities. An asset source transaction increases an asset account and a corresponding liability of stockholders’ equity account. The increase in the asset account is recorded with a debit entry. The increase in the liability or stockholders’ equity account is recorded with a credit entry. o Owners Contribute Assets – Increases both assets and stockholders equity. The increase in assets (Cash) is recorded with a debit and the increase in stockholders equity (Common Stock) is recorded with a credit. o Creditor Provides Assets – Increases both assets and liabilities. The increase in assets (Cash) is recorded with a debit and the increase in liabilities (Notes Payable) is recorded with a credit. o Operating Activity Provides Assets – Increases both assets and stockholders’ equity. The increase in assets (Accounts Receivable) is recorded with a debit, and the increase in stockholders equity (Consulting Revenue) is recorded with a credit. Asset Exchange Transactions – Involve trading one asset for another asset. One asset account increases, the other decreases. The total amount of assets remains unchanged. Asset exchange transactions are recorded by debiting the asset account that is increasing and crediting the asset account that is decreasing. They have the following effects on the accounting equation:
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o Exchange Cash for Note Receivable – The note receivable represents an investment. Recognizing the investment (loan) increases one asset account and decreases another. The increase in assets (Notes Receivable) is recorded with a debit, and the decrease in assets (Cash) is recorded with a credit. o
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This note was uploaded on 04/18/2008 for the course ACCT 201 taught by Professor Stewart during the Fall '06 term at Towson.

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Chapter 4 Double Entry Accounting - CHAPTER THE...

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