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Double-Entry Accounting

“ Double-entry accounting is based on a


simple concept: each party in a business
transaction will receive something and give
something in return. In bookkeeping terms,
what is received is a debit and what is given
is a credit. The T account is a representation
of a scale or balance.”

Scale or Balance T account

Left Side Right Side

DEBIT CREDIT

DEBIT CREDIT
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Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
=

Liabilities
Assets
Owner’s Equity
Net
Income
Revenues
Expenses

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King Ranch
Chart of Accounts

Balance Sheet Income Statement


1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable
14 Supplies 5. Expenses
51 Wages Expense
15 Prepaid Insurance
17 Land 52 Rent Expense
18 Equipment 54 Utilities Expense
55 Supplies Expense
2. Liabilities 59 Miscellaneous
21 Accounts Payable Expense
23 Unearned Rent
3. Owner’s Equity
31 Pat King, Capital
32 Pat King, Drawing

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Journal, Ledger, Trial Balance

1. Transactions are analyzed


and recorded in journal.
Documents
Journal

2. Transactions are posted


from journal to ledger.
Journal Ledger

3. Trial balance is prepared.


Trial Balance

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Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400

1. Analyze and record the transaction as shown.


2. Post the debit side of the transaction.
3. Post the credit side of the transaction.

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Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400
1 General Ledger
Account: Prepaid Insurance Account No. 15
Post. Balance
Date Item Ref. Debit Credit Debit Credit

Enter the transaction date in the ledger account


Enter the debit amount in the ledger debit column
Update the ledger account balance
Enter the journal page in the ledger account
Enter the ledger account number in the journal
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Reporting Revenue and Expense

TWO METHODS

Cash Basis of Accounting


Accrual Basis of Accounting

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Cash Basis of Accounting

 Revenue reported when cash is received


 Expense reported when cash is paid
 Does not properly match revenues and
expenses

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Accrual Basis of Accounting

 Revenue reported when earned


 Expense reported when incurred
 Properly matches revenues and expenses
in determining net income
 Requires adjusting entries at end of period
 It just sounds mean – it really isn’t

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The Matching Concept

Debits = Credits

Liabilities
Assets Owner’s
Equity
Net
Income

Expenses Revenues
matching

Net income is determined by properly


matching expenses and revenues.

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Adjustments – Deferrals and Accruals

Revenues Current Period Future Period


Deferrals Cash Received Revenue Recorded

Accruals Revenue Recorded Cash Received

Expenses
Current Period Future Period
Deferrals Cash Paid Expense Recorded

Accruals Expense Recorded Cash Paid

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