The Account - The Account Rather than using a tabular...

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The Account Rather than using a tabular summary like the one in Illustration 3-3 for Sierra Corporation, an accounting information system uses accounts. An account is an individual accounting record of increases and decreases in a specific asset, liability, stockholders' equity, revenue, or expense item. For example, Sierra Corporation has separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.) In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side. Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account . The basic form of an account is shown in Illustration 3-4 . Illustration 3-4 Basic form of account We use this form of account often throughout this book to explain basic accounting relationships. Debits and Credits The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account. When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits. Note the position of the debit side and credit side in Illustration 3-4 . The procedure of recording debits and credits in an account is shown in Illustration 3-5 for the transactions affecting the Cash account of Sierra Corporation. The data are taken from the Cash column of the tabular summary in Illustration 3-3 .
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Tabular summary and account form for Sierra Corporation's Cash account Every positive item in the tabular summary represents a receipt of cash; every negative amount represents a payment of cash. Notice that in the account form we record the increases in cash as debits, and the decreases in cash as credits. For example, the $10,000 receipt of cash (in red) is debited to Cash, and the -$5,000 payment of cash (in blue) is credited to Cash. Having increases on one side and decreases on the other reduces recording errors and helps in
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This document was uploaded on 11/03/2011 for the course ACCOUNTING ac 201 at Montgomery.

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The Account - The Account Rather than using a tabular...

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