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The various transactions that caused increases and

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Unformatted text preview: rising the entire financial statements).that cash has a balance of $63,000 as of January 12. By examining the account, This account reveals you can see the various transactions that caused increases and decreases to the $50,000 beginning of month cash balance. In many respects, this Cash account resembles the “register” you might keep for a wallet style check book. If you were to prepare a balance sheet on January 12, you would include cash for the indicated amount (and, so forth for each of the other accounts comprising the entire financial statements). Download free eBooks at bookboon.com 28 Basics of Accounting & Information Processing Accounts, Debits, and Credits 6.2 Debits and Credits Without a doubt, you have heard or seen a reference to debits and credits; perhaps you have had someone “credit” your account or maybe you have used a “debit” card to buy something. Debits (abbreviated “dr”) and credits (abbreviated “cr”) are unique accounting tools to describe the change in a particular account that is necessitated by a transaction. In other words, instead of saying that cash is “increased” or “decreased,” we say that cash is “debited” or “credited.” This method is again traced to Pacioli, the Franciscan monk who is given credit for the development of our enduring accounting model. Why add this complexity -- why not just use plus and minus like in the previous chapter? You will soon discover that there is an ingenious answer to this question! Understanding the answer to this question begins by taking note of two very important observations: (1) every transaction can be described in debit/credit form and (2) for every transaction, debits = credits 6.3 The Fallacy of ”+/-“ Nomenclature The second observation above would not be true for an increase/decrease system. For example, if services are provided to customers for cash, both cash and revenues would increase (a “+/+” outcome). On the other hand, paying an account payable causes a decrease in cash and a decrease in accounts payable (a “-/-” outcome). Finally, some transactions are a mixture of increase/decrease effects; using cash to buy land causes cash to decrease and land to increase (a “-/+” outcome). In the previous chapter, the “+/-” nomenclature was used for the various illustrations. As you can tell by reviewing the illustration in Part 1, the “+/-” system lacks internal consistency. Therefore, it is easy to get something wrong and be completely unaware that something has gone amiss. On the other hand, the debit/credit system has internal consistency. If one attempts to describe the effects of a transaction in debit/credit form, it will be readily apparent that something is wrong when debits do not equal credits. Even modern computerized systems will challenge or preclude any attempt to enter an “unbalanced” transaction that does not satisfy the condition of debits = credits. 6.4 The Debit/Credit Rules At first, it is...
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