Chapter 2

Fundamental Accounting Principles by

◦ Wild
◦ Larson
◦ Chiappetta
 Overview of Previous Lecture
Prepare the accounting equation according to given transections.
a. Owner invested $70000 cash along with equipment had a $ 10,000 market value.
b. Expression paid $ 1500 cash for furniture.
c. Purchased $12000 additional equipment on credit.
d. Completed work for a client and earned 2000 cash.
e. Completed work for a client and sent a bill for $2000 cash to be paid within 30 days.
f. Paid an assistant $2400 cash as a wages.
g. Cash withdrawal of $ 1000 for personal use.
Basic Terminologies
An account is an individual accounting record of increases and decreases.
A company will have separate accounts for such items as cash, salaries
expense, accounts payable, and so on.
The act of entering an amount on the left side of an account is called debiting
the account and making an entry on the right side is crediting the account.
When the debit amounts exceed the credits, an account has a debit balance;
when the reverse is true, the account has a credit balance.
Basic form of account
In its simplest form, an account consists of
1. The title of the account
2. A left or debit side
3. A right or credit side
The alignment of these parts resembles the letter T, and therefore the account form is called a T
account.

Title of Account
Left or debit side Right or credit side

Debit balance Credit balance

Tabular form compared to account form
Cash
$15,000 Cash
- 7,000 Debit Credit
1,200 15,000 7,000
1,500 1,200 600
- 600 1,500 900
- 900 600 200
- 200 250
- 250 1,300
600
- 1,300 Balance
$8,050
Debiting an account
Example: The owner makes an initial investment of $15,000 to start the
business. Cash is debited and the owner’s Capital account is
credited.

Cash
15,000
Crediting an account
Example: Monthly rent of $7,000 is paid. Cash is credited and Rent
Expense is debited.

Cash
7,000
Cont.….
Example: Cash is debited for $15,000 and credited for $7,000, leaving a
debit balance of $8,000.

Cash
15,000 7,000
8,000
Double entry system
In a double-entry system, equal debits and credits are made in
the accounts for each transaction.
The total debits will always equal the total credits and the
accounting equation will always stay in balance.
Every account classification has a normal balance, whether
it is a debit or credit.

Assets = Liabilities + Owner’s Equity

Normal balance-assets and liabilities
Assets
Increase Decrease
Debit Credit
Normal
Balance

Liabilities
Decrease Increase
Debit Credit
Normal
Balance
Normal balance-Owners capital
Owners Capital
Decrease Increase
Debit Credit
Normal
Balance
Owners Drawings
Owner’s Drawings
Increase Decrease
Debit Credit
Normal
Balance
Revenues and Expenses
Revenues
Decrease Increase
Debit Credit
Normal
Balance
Expenses
Increase Decrease
Debit Credit
Normal
Balance
Basic equation and debit/credit rules and effects
Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + -
Capital Drawings
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

Revenues Expenses
+ -
Dr. Cr. Dr. Cr.
- + + -
The recording process
Analyze each transaction.
Enter transaction in a journal.
Transfer journal information to ledger accounts.
Prepare and analyze the trial balance.
The journal
Transactions are initially recorded in chronological order in a journal
before being transferred to the accounts.
Every company has a general journal which contains:
1. Spaces for dates
2. Account titles and explanations
3. References
4. Two money columns
The journal
The journal makes several significant contributions to the recording
process:
1. It discloses, in one place, the complete effect of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts
for each entry can be readily compared.
Journalizing
Entering transaction data in the journal is known as journalizing.
Separate journal entries are made for each transaction.
A complete entry consists of
1. The date of the transaction
2. The accounts and amounts to be debited and
credited
3. A brief explanation of the transaction
Technique of journalizing
The date of the transaction is entered in the date column.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
Technique of journalizing
The debit account title is entered at the extreme left margin of the
Account Titles and Explanation column. The credit account title is
indented on the next line.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
Technique of journalizing
A brief explanation of the transaction is given.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2002
Sept. 1 Cash 15,000
M. Doucet, Capital 15,000
Invested cash in business.

1 Equipment 7,000
Cash 7,000
Purchased equipment for cash.
The ledger
The entire group of accounts maintained by a company is referred to
collectively as the ledger.
A general ledger contains all the assets, liabilities, and owner’s equity accounts.
Posting a general entry
General Journal J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
Invested cash in business.

General Ledger
Cash 101
Date Account Title and Explanation Ref Debit Credit Balance
2002
01-Sep J1 15,000 15,000
Cont.…
General Journal J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
Invested cash in business.
General Ledger
M. Doucet, Capital 301
Date Account Title and Explanation Ref Debit Credit Balance
2002
01-Sep J1 15,000 15,000
Assignment for next class
What are Accounting principles (general and specific) explain in
detail?