increases to the account balance and the other side represents decreases to the account balance. This is the tricky part, depending on the particular account: Sometimes the left (debit) side is the increase side, and sometimes the right (credit) side is the increase side. The reason for this is that when recording transactions, the accounting equation stays in balance.Since this is not intuitive, debit and credit rules are best memorized as soon as possible.
Image DescriptionWhen analyzing transactions, first think of what accounts are changed by the transaction, and then think about whichtype each account is. Next, apply the debit credit rule to determine whether each account should be debited or credited.After analyzing a transaction, write it down in the journal, which is also called the book of original entry. The act of recording the transaction in this way is called journalizing, and the product for each transaction is called a journal entry. Journal entries are listed in chronological order. Also, keep in mind an important rule - every entry must have equal debits and credits.Review the following video clips for more details about these procedures.Video ClipsRules of Debits and Credits (Duration - 3:48)| View Video TranscriptJournalizing Transactions (Duration - 1:23)| View Video TranscriptNext, each line in the journal entry should be posted to the appropriate Ledger Account represented by a large T account. After all transactions have been journalized and posted, determine balances in each account, and prepare a trial balance. A trial balance is simply a list of all the accounts and their balances. Two columns are used to separate the debit balances from the credit balances. The sum of the debit column must equal the sum of the credit column. The purpose of the trial balance is to prove the equality of the debits and the credits, and to aid in preparation of the next steps required in the accounting cycle.Accrual AccountingGAAP requires that accrual accountingbe used. This basis for accounting involves some basic accounting principles - the revenue recognition principle and the matching principle. The revenue recognition principle says that
revenues are recorded when earned, regardless of when the cash is received. It follows that expenses be recorded when they are incurred rather than when they are paid, so that the matching principle is followed. Matching dictates that revenues and the expenses incurred to generate them are recorded in the same accounting period. The intention of this is to ensure an accurate picture of the company's performance for that period of time.Many accounting procedures are necessary to comply with this set of principles. Adjusting entries are required at theend of the accounting period, before financial statements are prepared, to ensure that revenues and expenses are recognized in the proper accounting period. Some entries are related to deferrals, and some are related to accruals. A deferral involves putting off the recognition of a revenue or expense because the cash has changed hands before the appropriate recognition point. An accrual involves recording a revenue or expense because the recognition point is