Accounting 1 Dersi 2. Ünite Özet

Introduction

This chapter demonstrates how to record financial transactions and then combine transaction records to prepare financial statements. Like all the information systems have their own procedures based on defined rules for recording the data and reporting the results, accounting as a financial information system also uses its own procedures: debit and credit procedure in recording.

Accounts

Accounting equation expresses the basic relationships of accounting and contains three categories: assets, liabilities, and owner’s equity “Assets = Liabilities + Owner’s Equity” For each category of equation (for each asset, each liability, and each element of owner’s equity) we use a record called the account. An account is an individual accounting tool that shows the increases and decreases in a specific asset, liability, or owner’s equity item during a specified period.

Typical Asset Accounts

• Cash,
• Accounts Receivable,
• Notes Receivable,
• Prepaid Expenses,
• Land,
• Buildings,
• Equipment, Furnitures and Fixtures are typical asset accounts.

Typical Liability Accounts

• Accounts Payable,
• Notes Payable,
• Unearned Revenue (Advances from customers),
• Accrued Liabilities are typical liability accounts. Typical Owner’s Equity Accounts
• Owner,Capital.
• Owner, Withdrawals.
• Revenues.
• Expenses are typical owner’s equity accounts

Chart of Accounts

A chart of accounts is a created list of the account names used by an organization to define each class of items. A chart of accounts is used to organize a company’s accounts.

Ledger

The ledger is a record of all the accounts that the company uses the changes in those accounts, and their balances. A ledger is often defined as a book of accounts.

Debits, Credits And Double-Entry Accounting System

Each transaction shows a dual effect on the accounting equation.

The T-Account

An account, in its simplest form, has three parts. First, each account has a title, which is the name of the item recorded in the account. Second, each account has a space for recording increases in the amount of the item. Third, each account has a space for recording decreases in the amount of the item. T-accounts have a title and include two sides: Debit (left) and credit (right). Debit represents the left side of an account. Credit represents the right side of an account.

Debits and Credits

Debiting refers to the act of making an entry on the left side of an account and when debit amount exceeds credits, debit balance occurs. Crediting refers to the act of making an entry on the right side of an account and when credit amount exceeds debits, credit balance occurs.

Double-Entry Accounting System

In a double-entry system, equal debits and credits are made in the accounts for each transaction. Equality between the sum of all the debits and the sum of all the credits maintains the balance of accounting equation.

Increases and Decreases in the Accounts

Debit and credit rules are classified in the groups below;

• Dr./Cr. Rules for Assets: Assets increase on left side by debiting while decrease on right side by crediting and normally show debit balance.
• Dr./Cr. Rules for Liabilities: Liabilities increase on right side by crediting while decrease on left side by debiting and normally show credit balance.
• Dr./Cr. Rules for Contributions (Owner’s capital): Contributions increase on right side by crediting while decrease on left side by debiting and normally show credit balance.
• Dr./Cr. Rules for Distributions (Owner’s withdrawals): Distributions increase on left side by debiting while decrease on right side by crediting and normally show debit balance.
• Dr./Cr. Rules for Revenues: Revenues increase on right side by crediting while decrease on left side by debiting and normally show credit balance.
• Dr./Cr. Rules for Expenses: Expenses increase on left side by debiting while decrease on right side by crediting and normally show debit balance.

The Logic of Debit and Credit Procedure

The expended basic accounting equation is as follows,

• Assets = Liabilities + Contributions – Distributions + Revenues – Expenses

At the first step, we need to adjust the equation to make all the signs positive. For this, distributions and expenses can be moved to the left hand side of the equation. Thus, the expended basic accounting equation becomes as follows,

• Assets + Distributions + Expenses = Liabilities + Contributions + Revenues

The sign and the place of elements in the accounting equation determine the side of increase and decrease in Taccount. For instance, if an element on the left hand side of the accounting equation has negative sign, that means accounts of the element decrease on the left side while increase by crediting.

Steps in The Recording Process

There are three main steps which occur repeatedly in the recording process:

1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.

The Journal and Journalizing

Transactions are first recorded in a journal. Thus, the journal is referred to as the book of original entry. The journal is the main book which includes the original entries of company’s transactions. Typically, a journal includes dates of transactions, titles and references (codes) of accounts used to record transactions, column for debit amount and column for credit amount. Entering transaction data in the journal is known as journalizing.

Journal contributes to the recording process in terms of disclosing the details of transactions in one place. In other words, it helps to prevent and correct errors because it shows the complete effects of a transaction and provides chronological order.

In a journal entry, Debits are ALWAYS entered first, and Credits are INDENTED and listed second.

Posting to Ledger

journal information for each transaction is simultaneously transferred to individual T-accounts in order to calculate the balances of each account used in the journal entry. This act is called posting and the ledger refers to the entire group of individual T-accounts.

The journalizing and posting process has five steps:

• Step 1: Identify the accounts and the account types (asset, liability, or equity).
• Step 2: Decide whether each account increases or decreases and then apply the rules of debits and credits.
• Step 3: Record the transaction in the journal.
• Step 4: Post the journal entry to the ledger.
• Step 5: Determine whether the accounting equation is in balance.

Trial Balance

A trial balance is a list of all ledger accounts with their balances at a point in time. A trial balance summarizes the accounts by listing all the accounts with their balances— assets first, followed by liabilities, and then owner’s equity. A trial balance has three columns listing the names and the balances of all the accounts used in transactions. Balances are entered into appropriate debit or credit columns. The total amounts of debit and credit columns show the mathematical equality of debits and credits after posting. In this sense, if the sum of debits equal to the sum of credits, it means that the recordings are correct under double-entry system. If not, we must understand that there are errors in journalizing and posting then the accountant or bookkeeper must determine the reason.

In addition to proving the equality of debits and credits, the trial balance is also used to prepare the financial statements. The trial balance is normally prepared at the end of every accounting period and is the basis for preparation of financial statements. The income statement is prepared using the revenue and expense accounts from the trial balance. The net income relates to the increase (or in the case of a net loss, the decrease) in owner’s equity.