The Account and the Rules for Debit and Credit

ACCOUNT
Accounting device used to summarize the

increases and decreases in assets, liabilities and proprietorship A separate account must be prepared for each item affected by the business transaction Every account has two sides debit or DR and credit or CR

DEBIT

Left side of an account

CREDIT

Right side of an account

Fig. 4.1. Account (General Ledger)

DATE

ITEM

DR

DATE

ITEM

CR

Fig. 4.2. Account (Subsidiary Ledger)

DATE

ITEM

DR

CR

BALANCE

T-ACCOUNT
Simplest form of account Each T-account contains three basic

parts:

account title, debit and credit sides

Account Title

DR CR

T-ACCOUNT
Used to

indicate addition by position and subtraction by position

Account Title DR CR

ADDITION BY POSITION

Done by placing the amount to be added on the same side of the original amount

SUBTRACTION BY POSITION

Done by placing the amount to be subtracted on the side opposite the original amount Right side of an account

SUMMARY OF RULES FOR DEBIT AND CREDIT

Table 4.1. Summary of Rules for Debit and Credit

ACCOUNTS Asset Liability Capital Income Expense INCREASES DECREASES

Debit Credit Credit Credit Debit

Credit Debit Debit Debit Credit

CLASSIFICATION OF ACCOUNTS ACCORDING TO BALANCES

A. Open Account - Any account with a balance, either a debit or a credit balance - Debit balance if the total debit is greater than the total credit - Credit balance if the total credit is greater than the total debit

CLASSIFICATION OF ACCOUNTS ACCORDING TO BALANCES

B. Close Account - Any account with a zero balance, i.e., equal debit and credit totals

NORMAL ACCOUNT BALANCE

Normal balance of an account is the side that increases by the rules of debit and credit Accounts which are credited to record increases will normally have credit balances Accounts which are debited to record increases will normally have debit balances

Table 4.2. Summary of Normal Balance of Accounts

ACCOUNTS Asset Liability Capital Income Expense INCREASES DECREASES NORMAL BALANCE

Debit Credit Credit Credit Debit

Credit Debit Debit Debit Credit

Debit Credit Credit Credit Debit

STEPS IN ANALYZING BUSINESS TRANSACTIONS

1. Determine the items affected 2. Determine the category of the items affected 3. Determine the effect of the transaction in the items affected 4. Apply the rules for debit and credit

EXAMPLE
The following transactions of JAM Travel & Tours may be analyzed using the transaction analysis table: 1. Julie A. Mendoza put up a travel agency, JAM Travel & Tours, with initial capital investment of P200,000. 2. Paid office rental for 3 months, P60,000. 3. Bought office supplies for cash, P5,000. 4. Bought office equipment from IS Philippines on account, P40,000.

EXAMPLE
The following transactions of JAM Travel & Tours may be analyzed using the transaction analysis table: 1. Julie A. Mendoza put up a travel agency, JAM Travel & Tours, with initial capital investment of P200,000. 2. Paid office rental for 3 months, P60,000. 3. Bought office supplies for cash, P5,000. 4. Bought office equipment from IS Philippines on account, P40,000.

EXAMPLE
5. Paid P10,000 to IS Philippines as partial payment of the debt in transaction no. 4. 6. Received P20,000 as payment for rendering services to various customers. 7. The business determines that it has used up P2,000 of the supplies 8. J.A.Mendoza withdrew P5,000 from the business for her personal use.

EXAMPLE
9. Paid the following expenses incurred during the period: salaries of office staff = P16,000 and utilities expense = P 12,000 10. When the account or debt due to IS Philippines amounting to P30,000 fell due, J.A. Mendoza was not able to pay cash. She issued instead a promissory note to the same amount due in 60 days to IS Philippines. 11. Received the bill from Maynilad for water consumed during the month, P1,000. The business will pay the bill next week.

Trans. No. 1

Items Affected

Classification of Items Affected Asset

Effect of the Transaction Increase Increase Increase Decrease Increase Decrease Increase Decrease

Cash

Apply the Rules for Dr and Cr Dr Cr Dr Cr Dr Cr Dr Cr

J.A. Mendoza, Capital Capital 2 Rent Expense Cash 3 Office Supplies Cash 4 Office Equipment Accounts Payable Expense Asset Asset Asset Asset Liability

Trans. No. 5

Items Affected

Classification of Items Affected Liability Asset Asset Income Expense Asset

Effect of the Transaction Decrease Decrease Increase Increase Increase Decrease Increase Decrease

Accounts Payable Cash

Apply the Rules for Dr and Cr Dr Cr Dr Cr Dr Cr Dr Cr

Cash Fees Income

Supplies Expense Office Supplies

J.A Mendoza, Drawing Drawing Cash Asset

Items Affected Trans. No. 9 Salaries Expense Utilities Expense Cash 10 Accounts Payable Notes Payable 11 Utilities Expense Accounts Payable

Classification of Effect of the Items Affected Transaction Expense Increase Expense Asset Liability Liability Expense Liability Increase Decrease Decrease Increase Increase Increase

Apply the Rules for Dr and Cr Dr Dr Cr Dr Cr Dr Dr