Chapter Outline
Unearned Revenues are another form of liability which results when customers pay in
advance for products or services.
Other Liabilities include wages payable, taxes payable and interest payable.
3.
...
Chapter Outline
Unearned Revenues are another form of liability which results when customers pay in
advance for products or services.
Other Liabilities include wages payable, taxes payable and interest payable.
3. Equity Accounts include Owner Capital, Owner Withdrawals, and a separate account
for each type of Revenue and Expense. The owner capital account will be used for
owner investments only. Students often try to keep using this account at this point. It
should be pointed out that this account’s transactions will be very few in comparison
with the revenue and expense accounts. Owner withdrawals is also a new concept for
students at this point.
The chart of accounts is a list of all the accounts.
III. Debits and Credits ( LO3)
A T-account is a helpful learning tool representing all accounts in the ledger. It shows the
effects of transactions and events on specific accounts.
1. The left side of an account is called the debit side. A debit is an entry on the left side of
an account.
2. The right side of an account is called the credit side. A credit is an entry on the right
side of an account.
3. An account balance is the difference between the increases and decreases recorded in
an account. Otherwise explained, the account balance is the difference between the
increases (including the beginning balance) and decreases recorded in an account
Assets are on the left side of the fundamental accounting equation. Therefore the left or
debit side of the T-account is the normal balance for assets.
Liabilities and equity are on the right side therefore the right or the credit side is the
normal balance for liabilities and equity.
Withdrawals, revenues, and expenses are essentially changes in owner’s equity but it is
necessary to set-up temporary accounts for each of these items to accumulate data for
statements. Withdrawals and expense accounts represent decreases in owner’s equity
therefore they are assigned debit balances. Revenue accounts represent increases in
owner’s equity and therefore they are assigned credit balances.
Double-entry accounting is an accounting system that records the effects of transactions
and other events in at least two accounts with equal debts and credits. The total amount
debited must equal the total amount credited. Therefore, the sum of the debit account
balances in the ledger must equal the sum of the credit account balances. (Note: It is
extremely important for students to practice analyzing each of the basic transactions into
debits and credits.)
Note: It is crucial that students understand basic debit-credit theory. After introducing
the rules, illustrative transactions can be presented by:
• Analyzing the transaction
• Determining the types of accounts affected (asset, liability, equity, revenue,
expense)
• Determining which accounts increase and/or decrease
• Converting the increase/decrease to debit/credit.
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