The Accounting Cycle:

Capturing Economic Events

Chapter 3

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

The Ledger
Cash

Accounts Payable

Accounts are individual records showing increases and decreases. The entire group of accounts is kept together in an accounting record called a ledger.
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Capital Stock

The Use of Accounts

Increases are recorded on one side of the T account, and decreases are recorded on the other side.

Title of Account

Left or Debit Side

Right or Credit Side

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Debit and Credit Entries

5/1 5/25 5/29 5/31 Bal. Cash 8,000 5/2 2,500 Payments are credit 75 5/8 2,000 on the side. 750 5/28 150 5/31 50 4,125 The balance is the
difference between the debit and credit entries in the account.

Receipts are on the debit side.

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Debit and Credit Entries

Debits and credits affect accounts as follows:

A = L + OE
ASSETS Debit Credit for for Increase Decrease LIABILITIES Debit Credit for for Decrease Increase EQUITIES Debit Credit for for Decrease Increase
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The Journal
In an actual accounting system, transactions are initially recorded in the journal.
GENERAL JOURNAL
Date 2009 May 1 Cash Capital Stock Owners invest cash in the business.
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Account Titles and Explanation

Debit 8,000

Credit

8,000

Posting Journal Entries to the Ledger Accounts

Posting simply means updating the ledger accounts for the effects of the transactions recorded in the journal.
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Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL
Date 2009 May 1 Cash Capital Stock Owners invest cash in the business. General Ledger 8,000 8,000 Account Titles and Explanation Debit Credit

Date 2009 May 1

Cash Debit Credit 8,000

Balance 8,000
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Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL
Date 2009 May 1 Cash Capital Stock Owners invest cash in the business. General Ledger 8,000 8,000 Account Titles and Explanation Debit Credit

Date 2009 May 1

Capital Stock Debit Credit 8,000

Balance 8,000
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Ledger Accounts After Posting

General Ledger Cash Debit Credit 8,000 2,500

Date 2009 May 1 2

Balance 8,000 5,500

T accounts are simplified versions of the ledger account that only show the debit and credit columns.
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What is Net Income?

Net income is not an asset its an increase in owners equity from profits of the business.

A = L + OE
Increase Decrease Increase As income is earned, either an asset is increased or a liability is decreased. Net income always results in the increase of Owners Equity
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Revenue and Expenses

The price for goods sold and services rendered during a given accounting period. Increases owners equity.

The costs of goods and services used up in the process of earning revenue.

Decreases owners equity.

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Debit and Credit Rules for Revenue and Expenses

Expenses decrease owners equity.
EQUITIES Debit Credit for for Decrease Increase

Revenues increase owners equity.

EXPENSES Debit Credit for for Increase Decrease

REVENUES Debit Credit for for Decrease Increase

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Dividends
Payments to owners decrease owners equity.
DIVIDENDS
Debit Credit for for Increase Decrease

EQUITIES
Debit Credit for for Decrease Increase

Owners investments increase owners equity.

CAPITAL STOCK

Debit Credit for for Decrease Increase

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End of Chapter 3

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