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LECTURE NOTES FOR CHAPTER 2 Look at the big spreadsheet on the bottom of page 14. If you are keeping books for Ma and Pa’s corner grocery store and only have about 10 transactions a month, that method of accounting would work just fine. However, for a big company, that approach won’t work. It’s a sweet little fairy tale that the author uses to acquaint you with acounting terminology and what an accountant does; however, it isn’t the real deal. Starting in chapter 2, we see how accounting really works. The first thing we’re gonna do is get a book called a journal . (See top of page 75) Think of this book as the company’s dairy. However, the only thing we’re gonna record in this dairy are events and transactions that affect the company financially. If an old employee retires or a new employee begins work, even those events are important, they would not be recorded in the journal because they do not affect the company financially. Here’s a popular test question: If you sign a contract to do some work for someone, would that fact be recorded in the journal? NO! Nothing has actually happened yet. You haven’t actually done any work and no money has changed hands. Lets get acquainted with the journal at the top of page 75. Reading from left to right, “Date” is pretty self explanatory. “Description” is where we enter the titles of the accounts that were affected by the event that we are recording.“Post Ref” is something that you don’t need to know at this time. We’ll get to that later. Now we come to the two stars of the show: Debit and Credit. All your life you’ve heard expressions like “Joe is a real fine fellow, he’s a real credit to his family”. On test day students ask for partial credit. I’ve never had a student ask for partial debit. After hearing expressions like these, people get the idea that credits must be good stuff. Then, they conclude that if credits are good, then debits must be bad. This all sounds very logical but it isn’t right. CREDITS ARE NOT GOOD AND DEBITS ARE NOT BAD. Debit means “ left hand column” and credit means “ right hand column” and that is all they mean. Before you can say a debit is good or bad, you first have to know what account you’re talking about. To debit an asset account is good. To debit an expense account is bad. Remember, “debit” means left and “credit means “right. And that’s all they mean. Here is the most exciting bit of trivia you’ll hear all day: The abbreviation for debit is “Dr” and “Cr” for credit. When you record a transaction, sometimes you put the dollar amount in the debit column next to the account name and sometimes you put the dollar amount in the credit column. How do you know when to do what?
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