Learning Exercise

Key terms Account: a location within an accounting system in which the increases and decreases in a specific asset, liability, or owner’s equity are recorded and stored Ledger: a book or file containing a separate page for each business account. It serves as a permanent record of financial transactions Chart of Accounts: a list of all the accounts and their assigned account numbers Assets begin with 1, Liabilities begin with 2, Owner’s Equity begin with 3, Revenue begin with 4, Expense begin with 5. Double Entry Accounting: a system of record keeping in which each transaction affects at least two accounts (requires at least two accounts be affected w/ every transaction) T accounts: because of its T-shape, shows the dollar increase or decrease in an account that is caused by a transaction *T accounts help the accountant analyze the parts of a business transaction Debit: an amount entered on the LEFT side of the T account Credit: an amount entered on the RIGHT side of the T account *The words DEBIT and CREDIT are the accountant’s terms for LEFT and RIGHT Normal Balance: an accounts normal balance is always on the side used to record increases to the account. *Normal = increase. Whatever side increases the account is the “normal” balance *You will always have at least (1) Debit and at least (1) Credit. *You will never have ONLY 2 Debits or ONLY 2 Credits *After each transaction what you Debit must = what you Credit Rules for Asset Accounts 1. An asset account is INCREASED (+) on the DEBIT side (left side). 2. An asset account is DECREASED (-) on the CREDIT side (right side). 3. The normal balance for an asset account is the INCREASE side, or the DEBIT side. Rules for Liability and Owner’s Equity 4. Liability and Owner’s Equity accounts are INCREASED on the CREDIT side (right side). 5. Liability and Owner’s Equity accounts are DECREASED on the DEBIT side (left side). 6. The normal balance for liability and owner’s equity accounts is the INCREASE side, or the CREDIT side.