Debits and Credits
The terms debit and credit mean left and right, respectively, the abbreviation of
these two words as follows:
* Debit Dr. * Credit Cr.
* These abbreviations come from the Latin words debere (Dr.) and credere (Cr.).
A ┬ Account has a left side and a right side, thus, an account is debited when an amount is
entered on the left side and credited when an amount is entered on the right side. Whether
a debit or credit is an increase or decrease to the account balance depends on the account
classification as illustrated below:
Assets Liabilities
Example: Cash Example: Accounts payable
Dr. Cr. Dr. Cr.
Debit to
increase
+
Credit to
decrease
─
Debit to
decrease
─
Credit to
increase
+
Expenses Revenues
Example: Salaries Example: Sales of goods
Dr. Cr. Dr. Cr.
Debit to
increase
+
Credit to
decrease
─
Debit to
decrease
─
Credit to
increase
+
Owner’s equity
Example: Capital
Dr. Cr.
Debit to
decrease
─
Credit to
increase
+
General Journal
Double Entry System
As you have learned, every recorded transaction affects at least two accounts. This
dual effect is known as double-entry accounting. Note, however, that the term “double
entry” does not mean that a transaction must affect each side of the transaction, it may
effects one.
Example:
Transaction (٢) – illustrated earlier – purchase of equipment for cheque – Saleh
purchased a computer for ٢٠،٠٠٠ SR paid by cheque. This transaction results in an
equal increase and decrease in total assets, though the composition of assets is changed:
Bank is decreased by ٢٠،٠٠٠ SR and the assets Equipment is increased by ٢٠،٠٠٠ SR
Before You Go on
Review it
١. What are the classifications of accounts?
٢. Give an example for each classified account?
٣. What are the accounts that belong to the income statement, and what are those
belong to the Balance sheet?
٤. What do the term debit and credit mean?
٥. What are the debit and credit effects on assets, liabilities, owner’s equity, expenses
and revenues?
٦. What does double entry mean?
Do it
I. Place the missing items in the following statements:
١. the accounting equation is _________ = ________ + _______
٢. the accounting elements are documents ________ , ________
٣. Items required by an entity that have monitory value are known as
_____________.
٤. _________ is the interest of the owners in Business.
٥. Financial events that occur in an entity are termed ________.
٦. An investment in the entity increase ________ and _______.
٧. To purchase “on account” is to create a _________.
٨. When the words “paid on account” occur, it means a reduction of the assets
_________ and reduction of the liability ________.
٩. The left side of the account is known as the ________, where as the right side
is the ___________.
١٠.The balance sheet contains ____________, __________, and __________.
Answers: ١. assets, liabilities, owner’s equity; ٢. accounting records, financial report; ٣. assets;
٤. owner’s equity; ٥. transactions; ٦. assets, owner’s equity; ٧. liability; ٨. cash or
bank, accounts payable; ٩. the debit side, the credit side; ١٠. assets, liabilities and
owner’s equity.
II. Transactions completed by Saleh work shop, appear below. Indicate increase
(+), decrease (─), or no change (٠) in.
Expenses Revenues Assets Liabilities Owner’s
Equity
a. Invested ١٠٠،٠٠٠ SR, and
deposit it in a bank
b. Paid rent expense for the
month
c. Transfer money from the
bank to the cash
d. Cash collected for the
week revenue
e. Bought mechanic
equipment paying cash
f. Bought equipment on
account
g. Paid a creditor (liability)
money owned
Solution
Expenses Revenues Assets Liabilities Owner’s
Equity
a. Increase of bank and
capital
٠ ٠ + ٠ +
b. Reduction of bank and
increase expenses + ٠ ─ ٠ ٠
c. Increase of cash and
decrease of bank ٠ ٠ ± ٠ ٠
d. Increase of cash and
revenues ٠ + + ٠ ٠
e. Increase of equipment and
decrease of cash ٠ ٠ ± ٠ ٠
f. Increase of equipment and
in accounts payable ٠ ٠ + + ٠
g. Decrease in cash and
accounts payable ٠ ٠ ─ ─ ٠
Part Two
General Journal
- It is the first book to record financial transaction in chronological order.
- It has spaces for date, accounts titles & explanations, references, and two money
columns, as illustrated below:
General Journal J١
Title & explanation Ref. Debit Credit
٢٠٠٢
Dec ١
٠
١
٥
١
٦
Journalizing
Entering transaction data into Journal is known as Journalizing.
Steps for journalizing a transaction
- Analyze the transaction to determine which accounts are affected.
- Analyze the accounts to determine which account is the debit part and which one is
the credit part.
- Record the transaction following the example illustrated below.
General Journal J١
Date Title & Explanation Ref. Debit Credit
٢٠٠٢
Nov. ٢٥ Bank ١٠٠،٠٠٠
Capital ١٠٠،٠٠٠
Investment in workshop business
Dec. ٠١ Rent expense ١٠،٠٠٠
Bank ١٠،٠٠٠
Payment of office rent cheque
No.٢
Note: The date should be entered in the date column.
- The year and the month are not repeated until the start of a new page or a new
month.
- The title of the account to be debited is entered against the left margin of the title &
explanation column.
- The amount to be debited to each account is entered in the debit column on the same
line as the account title.
- The account to be credited follows the same steps except being in the credit side.
- An explanation of the transaction may be entered on the next line below the journal
entry.
- The posting reference column is left blank till the transaction is being posted.
Example:
During the month of January, Mr. Al-rashed, lawyer.
١. Invested SR٥٠, ٠٠٠ to open his law practice.
٢. Bought supplies (stationery, forms, pencils, etc) for cash, SR٣, ٠٠٠.
٣. Bought office equipment from Al-aamer Furniture Company on account, SR٢٥, ٠٠٠.
٤. Received SR٢٠, ٠٠٠ in fees earned during the month.
٥. Paid office rent for January, SR٥, ٠٠٠.
٦. Paid salary for part-time help, SR٢, ٠٠٠.
٧. Completed a consultation to one of his friends for SR١٥, ٠٠٠ cash.
٨. Paid SR١٠،٠٠٠ to Al-aamer Furniture Company on account.
These transactions might be analyzed and recorded as follows in next
Transaction (١) Mr. AL-rashed invested SR ٥٠،٠٠٠ to open his law practice. There
are two accounts that are affected: the asset Cash is increased, and the capital of the
firm is increased by the same amount.
Ass
ets
& Expenses = Liabilities & Revenues &
Owner’s Equity
Cash
Capital
+SR٥٠،٠٠٠
Transaction (٢) Bought supplies for cash, SR٣, ٠٠٠. In this case, Mr. AL-rashed is
substituting one asset for another: He is receiving (+) the asset Supplies and paying
out () the asset Cash. Note that the capital of SR٥٠, ٠٠٠ remains unchanged, but
there is still equality.
Assets & Expenses = Liabilities & Revenues & Owner’s Equity
Cash
Transaction (٣) Bought office equipment from Al-aamer Furniture Company on
account, SR٢٥, ٠٠٠. He is receiving the asset Equipment but is not paying for it
with the asset Cash. Instead, he will owe the money to the Al-aamer Furniture
Company. Therefore, he is liable for this amount in the future, thus creating the
liability Accounts Payable.
Assets & Expenses = Liabilities & Revenues & Owner’s
Equity
Cash
Transaction (٤) Received SR٢٠, ٠٠٠ in fees earned during the month. Because he
received SR٢٠, ٠٠٠, the asset Cash increased and also his capital increased. It is
important to note that he labels the SR٢٠, ٠٠٠ Fees Income to show its origin. This
is known as Revenue or Income.
Assets & Expenses = Liabilities & Revenues & Owner’s
Equity
Cash
Transaction (٥) Paid office rent for January, SR٥, ٠٠٠. When the word “paid” is
stated, you know that it means a deduction from Cash, since he is paying out his
asset Cash. Payment of expense is a reduction of capital. It is termed Rent Expense.
Assets
&
Expenses = Liabilities & Revenues & Owner’s
Equity
Cash
+
Transaction (٦) Paid salary for part-time help, SR٢, ٠٠٠. Again the word “paid”
means a deduction of cash and a reduction in capital. This time it refers to Salaries
Expense.
Transaction (٨) Paid SR١٠, ٠٠٠ to Al-aamer Furniture Company on account. Here
Mr. Saleh is reducing the asset Cash because he is paying SR١٠, ٠٠٠, and reducing
the liability Accounts Payable. He will now owe SR١٠, ٠٠٠ less.
Assets
Expenses = Liabilities & Revenues & Owner’s
Equity
١. The four phases of accounting are __________, __________, __________, and
_____________.
٢. The accounting equation is _________ = __________ + ___________.
٣. Items owned by a business that have monetary value are known as
________________.
٤. ___________ is the interest of the owners in a business.
٥. money owed to an outsider is a(n) ______________.
٦. the difference between assets and liabilities is _____________.
٧. financial events that occur in a business are termed ______________.
٨. an investment in the business increases ________ and ______________.
٩. to purchase “on account” is to create a(n) ____________.
١٠. when the words “paid on account” occur, it means a reduction of the asset
__________ and reduction of the liability _____________.
١١. income increases net assets and also ___________.
١٢. a withdrawal of cash reduces cash and ____________.
Answers: ١. recording, classifying, summarizing, reporting; ٢. assets, liabilities,
owner’s equity; ٣. assets; ٤. owner’s equity; ٥. liability; ٦. owner’s equity; ٧.
transactions; ٨. assets, owner’s equity; ٩. liability; ١٠. cash, Accounts Payable; ١١.
owner’s equity; ١٢. capital.
Determine what accounts are affected, by how much, and if it is an
increase (+), decrease (-), or there is no effect (٠).
Nov. ٥ Invested SR٧, ٠٠٠ cash and SR٤٠٠ of supplies into the business
٧ Received SR٤،٢٠٠ for services rendered
٩ Purchased equipment on account, SR٣, ٧٠٠
١١ Paid SR٧٥٠ for supplies
١٤ Paid salaries, SR٢, ١٠٠
١٦ Paid SR٣, ٥٠٠ for land
١٧ Paid SR٢, ٠٠٠ on account from Nov. ٩ transaction
١٩ Paid utilities, SR٢٠٠
٢٠ Paid SR٣،٠٠٠ for supplies and SR٧٠٠ for equipment
٢١ Received SR٤٧،٠٠٠ for services rendered
٢٥ Withdrew SR٢،٠٠٠ cash for personal use
٣٠ Inventory of supplies showed SR٦٠٠ of supplies on hand
Record the effect of each transaction in the following table:
Cash Supplies Equipment Land Accounts
Payable Capital
THE TRIAL BALANCE
As every transaction results in an equal amount of debits and credits in the ledger, the total
of all debit entries in the ledger should equal the total of all credit entries. At the end of the
accounting period we check this equality by preparing a schedule called a trial balance,
which compares the total of all debit balances with the total of all credit balances. The
procedure is as follows:
١. List account titles in numerical order.
٢. Record the balance of each account, entering debit balances in the debit column
and credit balances in the credit column. (Note: Asset and expense accounts are
debited for increases and would normally have debit balances. Liability, capital,
and income accounts are credited for increases and would normally have credit
balances).
٣. Add the columns and record the totals.
٤. Compare the totals. They must both be the same.
If the totals agree, the trial balance is in balance, indicating the equality of the debits
and credits for the hundreds or thousands of transactions entered in the ledger. Although
the trial balance provides arithmetic proof of the accuracy of the records, it does not
provide theoretical proof. For example, if the purchase of equipment was incorrectly
charged to Expense, the trial balance columns may agree, but theoretically the accounts
would be wrong, as Expense would be overstated and Equipment understated. In addition
to providing proof of arithmetic accuracy in accounts, the trial balance facilitates the
preparation of the periodic financial statements.
To illustrate how to determine the trial balance, follow the example below:
The summary of the transactions for Mr. AL-rashed and their effect on the accounts is
shown below. The trial balance is then taken. Note that each account now has a numerical
designation, in this case using a two-digit base.
Assets Liabilities Owner’s Equity
Supplies Income Fees
Equipment Rent Expense
Salaries Expense
Al-Rashed, Lawyer
Trial Balance
January ٣١, ١٩X٨
Dr. Cr.
Cash ٦٥،٠٠٠
Supplies ٣،٠٠٠
Equipment ٢٥،٠٠٠
Accounts Payable ١٥،٠٠٠
Consultation ١٥،٠٠٠
Income Fees ٢٠،٠٠٠
Rent Expense ٥،٠٠٠
Salaries Expense ٢،٠٠٠
SR١٠٠،٠٠٠ SR١٠٠،٠٠٠
JOURNALIZING
We describe the entries in the general journal according to the numbering.
(١) Date. The year, month, and day of the entry are written in the
date column. The year and month do not have to be repeated for additional
entries until a new month occurs or a new page is needed.
(٢) Description. The account title to be debited is entered on the
first line, next to the date column. The name of the account to be credited is
entered on the line below and indented.
(٣) P.R. (Posting Reference). Nothing is entered in this column
until the particular entry is posted, that is, until the amounts are transferred to the
related ledger accounts. The posting process will be described in Sec. ٤٫٤.
(٤) Debit. The debit amount for each account is entered in this
column adjacent to the left margin. Generally there is only one item, but there
can be two or more separate items.
(٥) Credit. The credit amount for each account is indented and
entered in this column. Here again, there is generally only one account, but two
or more accounts with different amounts can be involved. When there is more
than one debit or credit in a single entry, the transaction is known as a compound
entry.
(٦) Explanation. A brief description of the transaction is usually
made on the line below the credit. Some accountants feel that if the transaction is
obvious, the explanation may be omitted. Generally a blank line is left between
the explanation and the next entry.
Example ١
To help in understanding the operation of the general journal, let us journalize the
transactions previously described for Mr. AL-rashed lawyer
Dec. ٤ Mr. AL-rashed invested SR٥٠،٠٠٠ in his law practice.
٤ Bought supplies for cash, SR٣،٠٠٠
٤ Bought equipment from Al-aamer Furniture Company on account, SR٢٥،٠٠٠
١٥ Received SR٢٠،٠٠٠ in fees earned during the month
٣٠ Paid office rent for January, SR٥،٠٠٠
٣٠ Paid salary for part-time help, SR٢،٠٠٠
٣٠ Completed a consultation to one of his friends for SR ١٥،٠٠٠ cash
٣١ Paid SR١٠،٠٠٠ to Al-aamer Furniture Company, on account.
Date Description P.R Dr. Cr.
٤ Equipment ٢٥،٠٠٠
Accounts Payable
Cash Bought equipment from Al-aamer
Fees Income
Received payment for services
Rent Expense ٥،٠٠٠
Cash
Paid rent for month.
Salaries Expense ٢،٠٠٠
Cash
Consultation fees ١٥،٠٠٠
Cash received
Cash
Payment on account to Al-aamer
POSTING
The process of transferring information from the journal to the ledger for the purpose of
summarizing is called posting. Primarily a clerical task, posting is ordinarily carried out in
the following steps:
١. Record the amount and date. The date and the amounts of the debits and credits
are entered in the appropriate accounts.
General Journal Page J-١
Date Description P.R. Dr. Cr.
٢. Record the posting reference in the account. The number of the journal page is
entered in the account.
٣. Record the posting in the journal. For cross-referencing, the code number of the
account is now entered in the P.R. column of the journal (solid line).
General Journal Page J-١
Date Description P.R. Dr. Cr.
Example ٢
The results of the posting from the journal of AL-rashid appear below.
Assets Liabilities Owner’s Equity
Cash Accounts Payable Capital
Contents
Part one
Close the nominal accounts into the profit & loss account –
preparation of income statement
The terms debit and credit mean left and right, respectively, the abbreviation of
these two words as follows:
* Debit Dr. * Credit Cr.
* These abbreviations come from the Latin words debere (Dr.) and credere (Cr.).
A ┬ Account has a left side and a right side, thus, an account is debited when an amount is
entered on the left side and credited when an amount is entered on the right side. Whether
a debit or credit is an increase or decrease to the account balance depends on the account
classification as illustrated below:
Assets Liabilities
Example: Cash Example: Accounts payable
Dr. Cr. Dr. Cr.
Debit to
increase
+
Credit to
decrease
─
Debit to
decrease
─
Credit to
increase
+
Expenses Revenues
Example: Salaries Example: Sales of goods
Dr. Cr. Dr. Cr.
Debit to
increase
+
Credit to
decrease
─
Debit to
decrease
─
Credit to
increase
+
Owner’s equity
Example: Capital
Dr. Cr.
Debit to
decrease
─
Credit to
increase
+
General Journal
Double Entry System
As you have learned, every recorded transaction affects at least two accounts. This
dual effect is known as double-entry accounting. Note, however, that the term “double
entry” does not mean that a transaction must affect each side of the transaction, it may
effects one.
Example:
Transaction (٢) – illustrated earlier – purchase of equipment for cheque – Saleh
purchased a computer for ٢٠،٠٠٠ SR paid by cheque. This transaction results in an
equal increase and decrease in total assets, though the composition of assets is changed:
Bank is decreased by ٢٠،٠٠٠ SR and the assets Equipment is increased by ٢٠،٠٠٠ SR
Before You Go on
Review it
١. What are the classifications of accounts?
٢. Give an example for each classified account?
٣. What are the accounts that belong to the income statement, and what are those
belong to the Balance sheet?
٤. What do the term debit and credit mean?
٥. What are the debit and credit effects on assets, liabilities, owner’s equity, expenses
and revenues?
٦. What does double entry mean?
Do it
I. Place the missing items in the following statements:
١. the accounting equation is _________ = ________ + _______
٢. the accounting elements are documents ________ , ________
٣. Items required by an entity that have monitory value are known as
_____________.
٤. _________ is the interest of the owners in Business.
٥. Financial events that occur in an entity are termed ________.
٦. An investment in the entity increase ________ and _______.
٧. To purchase “on account” is to create a _________.
٨. When the words “paid on account” occur, it means a reduction of the assets
_________ and reduction of the liability ________.
٩. The left side of the account is known as the ________, where as the right side
is the ___________.
١٠.The balance sheet contains ____________, __________, and __________.
Answers: ١. assets, liabilities, owner’s equity; ٢. accounting records, financial report; ٣. assets;
٤. owner’s equity; ٥. transactions; ٦. assets, owner’s equity; ٧. liability; ٨. cash or
bank, accounts payable; ٩. the debit side, the credit side; ١٠. assets, liabilities and
owner’s equity.
II. Transactions completed by Saleh work shop, appear below. Indicate increase
(+), decrease (─), or no change (٠) in.
Expenses Revenues Assets Liabilities Owner’s
Equity
a. Invested ١٠٠،٠٠٠ SR, and
deposit it in a bank
b. Paid rent expense for the
month
c. Transfer money from the
bank to the cash
d. Cash collected for the
week revenue
e. Bought mechanic
equipment paying cash
f. Bought equipment on
account
g. Paid a creditor (liability)
money owned
Solution
Expenses Revenues Assets Liabilities Owner’s
Equity
a. Increase of bank and
capital
٠ ٠ + ٠ +
b. Reduction of bank and
increase expenses + ٠ ─ ٠ ٠
c. Increase of cash and
decrease of bank ٠ ٠ ± ٠ ٠
d. Increase of cash and
revenues ٠ + + ٠ ٠
e. Increase of equipment and
decrease of cash ٠ ٠ ± ٠ ٠
f. Increase of equipment and
in accounts payable ٠ ٠ + + ٠
g. Decrease in cash and
accounts payable ٠ ٠ ─ ─ ٠
Part Two
General Journal
- It is the first book to record financial transaction in chronological order.
- It has spaces for date, accounts titles & explanations, references, and two money
columns, as illustrated below:
General Journal J١
Title & explanation Ref. Debit Credit
٢٠٠٢
Dec ١
٠
١
٥
١
٦
Journalizing
Entering transaction data into Journal is known as Journalizing.
Steps for journalizing a transaction
- Analyze the transaction to determine which accounts are affected.
- Analyze the accounts to determine which account is the debit part and which one is
the credit part.
- Record the transaction following the example illustrated below.
General Journal J١
Date Title & Explanation Ref. Debit Credit
٢٠٠٢
Nov. ٢٥ Bank ١٠٠،٠٠٠
Capital ١٠٠،٠٠٠
Investment in workshop business
Dec. ٠١ Rent expense ١٠،٠٠٠
Bank ١٠،٠٠٠
Payment of office rent cheque
No.٢
Note: The date should be entered in the date column.
- The year and the month are not repeated until the start of a new page or a new
month.
- The title of the account to be debited is entered against the left margin of the title &
explanation column.
- The amount to be debited to each account is entered in the debit column on the same
line as the account title.
- The account to be credited follows the same steps except being in the credit side.
- An explanation of the transaction may be entered on the next line below the journal
entry.
- The posting reference column is left blank till the transaction is being posted.
Example:
During the month of January, Mr. Al-rashed, lawyer.
١. Invested SR٥٠, ٠٠٠ to open his law practice.
٢. Bought supplies (stationery, forms, pencils, etc) for cash, SR٣, ٠٠٠.
٣. Bought office equipment from Al-aamer Furniture Company on account, SR٢٥, ٠٠٠.
٤. Received SR٢٠, ٠٠٠ in fees earned during the month.
٥. Paid office rent for January, SR٥, ٠٠٠.
٦. Paid salary for part-time help, SR٢, ٠٠٠.
٧. Completed a consultation to one of his friends for SR١٥, ٠٠٠ cash.
٨. Paid SR١٠،٠٠٠ to Al-aamer Furniture Company on account.
These transactions might be analyzed and recorded as follows in next
Transaction (١) Mr. AL-rashed invested SR ٥٠،٠٠٠ to open his law practice. There
are two accounts that are affected: the asset Cash is increased, and the capital of the
firm is increased by the same amount.
Ass
ets
& Expenses = Liabilities & Revenues &
Owner’s Equity
Cash
Capital
+SR٥٠،٠٠٠
Transaction (٢) Bought supplies for cash, SR٣, ٠٠٠. In this case, Mr. AL-rashed is
substituting one asset for another: He is receiving (+) the asset Supplies and paying
out () the asset Cash. Note that the capital of SR٥٠, ٠٠٠ remains unchanged, but
there is still equality.
Assets & Expenses = Liabilities & Revenues & Owner’s Equity
Cash
Transaction (٣) Bought office equipment from Al-aamer Furniture Company on
account, SR٢٥, ٠٠٠. He is receiving the asset Equipment but is not paying for it
with the asset Cash. Instead, he will owe the money to the Al-aamer Furniture
Company. Therefore, he is liable for this amount in the future, thus creating the
liability Accounts Payable.
Assets & Expenses = Liabilities & Revenues & Owner’s
Equity
Cash
Transaction (٤) Received SR٢٠, ٠٠٠ in fees earned during the month. Because he
received SR٢٠, ٠٠٠, the asset Cash increased and also his capital increased. It is
important to note that he labels the SR٢٠, ٠٠٠ Fees Income to show its origin. This
is known as Revenue or Income.
Assets & Expenses = Liabilities & Revenues & Owner’s
Equity
Cash
Transaction (٥) Paid office rent for January, SR٥, ٠٠٠. When the word “paid” is
stated, you know that it means a deduction from Cash, since he is paying out his
asset Cash. Payment of expense is a reduction of capital. It is termed Rent Expense.
Assets
&
Expenses = Liabilities & Revenues & Owner’s
Equity
Cash
+
Transaction (٦) Paid salary for part-time help, SR٢, ٠٠٠. Again the word “paid”
means a deduction of cash and a reduction in capital. This time it refers to Salaries
Expense.
Transaction (٨) Paid SR١٠, ٠٠٠ to Al-aamer Furniture Company on account. Here
Mr. Saleh is reducing the asset Cash because he is paying SR١٠, ٠٠٠, and reducing
the liability Accounts Payable. He will now owe SR١٠, ٠٠٠ less.
Assets
Expenses = Liabilities & Revenues & Owner’s
Equity
١. The four phases of accounting are __________, __________, __________, and
_____________.
٢. The accounting equation is _________ = __________ + ___________.
٣. Items owned by a business that have monetary value are known as
________________.
٤. ___________ is the interest of the owners in a business.
٥. money owed to an outsider is a(n) ______________.
٦. the difference between assets and liabilities is _____________.
٧. financial events that occur in a business are termed ______________.
٨. an investment in the business increases ________ and ______________.
٩. to purchase “on account” is to create a(n) ____________.
١٠. when the words “paid on account” occur, it means a reduction of the asset
__________ and reduction of the liability _____________.
١١. income increases net assets and also ___________.
١٢. a withdrawal of cash reduces cash and ____________.
Answers: ١. recording, classifying, summarizing, reporting; ٢. assets, liabilities,
owner’s equity; ٣. assets; ٤. owner’s equity; ٥. liability; ٦. owner’s equity; ٧.
transactions; ٨. assets, owner’s equity; ٩. liability; ١٠. cash, Accounts Payable; ١١.
owner’s equity; ١٢. capital.
Determine what accounts are affected, by how much, and if it is an
increase (+), decrease (-), or there is no effect (٠).
Nov. ٥ Invested SR٧, ٠٠٠ cash and SR٤٠٠ of supplies into the business
٧ Received SR٤،٢٠٠ for services rendered
٩ Purchased equipment on account, SR٣, ٧٠٠
١١ Paid SR٧٥٠ for supplies
١٤ Paid salaries, SR٢, ١٠٠
١٦ Paid SR٣, ٥٠٠ for land
١٧ Paid SR٢, ٠٠٠ on account from Nov. ٩ transaction
١٩ Paid utilities, SR٢٠٠
٢٠ Paid SR٣،٠٠٠ for supplies and SR٧٠٠ for equipment
٢١ Received SR٤٧،٠٠٠ for services rendered
٢٥ Withdrew SR٢،٠٠٠ cash for personal use
٣٠ Inventory of supplies showed SR٦٠٠ of supplies on hand
Record the effect of each transaction in the following table:
Cash Supplies Equipment Land Accounts
Payable Capital
THE TRIAL BALANCE
As every transaction results in an equal amount of debits and credits in the ledger, the total
of all debit entries in the ledger should equal the total of all credit entries. At the end of the
accounting period we check this equality by preparing a schedule called a trial balance,
which compares the total of all debit balances with the total of all credit balances. The
procedure is as follows:
١. List account titles in numerical order.
٢. Record the balance of each account, entering debit balances in the debit column
and credit balances in the credit column. (Note: Asset and expense accounts are
debited for increases and would normally have debit balances. Liability, capital,
and income accounts are credited for increases and would normally have credit
balances).
٣. Add the columns and record the totals.
٤. Compare the totals. They must both be the same.
If the totals agree, the trial balance is in balance, indicating the equality of the debits
and credits for the hundreds or thousands of transactions entered in the ledger. Although
the trial balance provides arithmetic proof of the accuracy of the records, it does not
provide theoretical proof. For example, if the purchase of equipment was incorrectly
charged to Expense, the trial balance columns may agree, but theoretically the accounts
would be wrong, as Expense would be overstated and Equipment understated. In addition
to providing proof of arithmetic accuracy in accounts, the trial balance facilitates the
preparation of the periodic financial statements.
To illustrate how to determine the trial balance, follow the example below:
The summary of the transactions for Mr. AL-rashed and their effect on the accounts is
shown below. The trial balance is then taken. Note that each account now has a numerical
designation, in this case using a two-digit base.
Assets Liabilities Owner’s Equity
Supplies Income Fees
Equipment Rent Expense
Salaries Expense
Al-Rashed, Lawyer
Trial Balance
January ٣١, ١٩X٨
Dr. Cr.
Cash ٦٥،٠٠٠
Supplies ٣،٠٠٠
Equipment ٢٥،٠٠٠
Accounts Payable ١٥،٠٠٠
Consultation ١٥،٠٠٠
Income Fees ٢٠،٠٠٠
Rent Expense ٥،٠٠٠
Salaries Expense ٢،٠٠٠
SR١٠٠،٠٠٠ SR١٠٠،٠٠٠
JOURNALIZING
We describe the entries in the general journal according to the numbering.
(١) Date. The year, month, and day of the entry are written in the
date column. The year and month do not have to be repeated for additional
entries until a new month occurs or a new page is needed.
(٢) Description. The account title to be debited is entered on the
first line, next to the date column. The name of the account to be credited is
entered on the line below and indented.
(٣) P.R. (Posting Reference). Nothing is entered in this column
until the particular entry is posted, that is, until the amounts are transferred to the
related ledger accounts. The posting process will be described in Sec. ٤٫٤.
(٤) Debit. The debit amount for each account is entered in this
column adjacent to the left margin. Generally there is only one item, but there
can be two or more separate items.
(٥) Credit. The credit amount for each account is indented and
entered in this column. Here again, there is generally only one account, but two
or more accounts with different amounts can be involved. When there is more
than one debit or credit in a single entry, the transaction is known as a compound
entry.
(٦) Explanation. A brief description of the transaction is usually
made on the line below the credit. Some accountants feel that if the transaction is
obvious, the explanation may be omitted. Generally a blank line is left between
the explanation and the next entry.
Example ١
To help in understanding the operation of the general journal, let us journalize the
transactions previously described for Mr. AL-rashed lawyer
Dec. ٤ Mr. AL-rashed invested SR٥٠،٠٠٠ in his law practice.
٤ Bought supplies for cash, SR٣،٠٠٠
٤ Bought equipment from Al-aamer Furniture Company on account, SR٢٥،٠٠٠
١٥ Received SR٢٠،٠٠٠ in fees earned during the month
٣٠ Paid office rent for January, SR٥،٠٠٠
٣٠ Paid salary for part-time help, SR٢،٠٠٠
٣٠ Completed a consultation to one of his friends for SR ١٥،٠٠٠ cash
٣١ Paid SR١٠،٠٠٠ to Al-aamer Furniture Company, on account.
Date Description P.R Dr. Cr.
٤ Equipment ٢٥،٠٠٠
Accounts Payable
Cash Bought equipment from Al-aamer
Fees Income
Received payment for services
Rent Expense ٥،٠٠٠
Cash
Paid rent for month.
Salaries Expense ٢،٠٠٠
Cash
Consultation fees ١٥،٠٠٠
Cash received
Cash
Payment on account to Al-aamer
POSTING
The process of transferring information from the journal to the ledger for the purpose of
summarizing is called posting. Primarily a clerical task, posting is ordinarily carried out in
the following steps:
١. Record the amount and date. The date and the amounts of the debits and credits
are entered in the appropriate accounts.
General Journal Page J-١
Date Description P.R. Dr. Cr.
٢. Record the posting reference in the account. The number of the journal page is
entered in the account.
٣. Record the posting in the journal. For cross-referencing, the code number of the
account is now entered in the P.R. column of the journal (solid line).
General Journal Page J-١
Date Description P.R. Dr. Cr.
Example ٢
The results of the posting from the journal of AL-rashid appear below.
Assets Liabilities Owner’s Equity
Cash Accounts Payable Capital
Contents
Part one
Close the nominal accounts into the profit & loss account –
preparation of income statement
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