3-13 ILLUSTRATION 3-1 DOUBLE-ENTRY ACCOUNTING SYSTEM DOUBLE-ENTRY ACCOUNTING REAL (PERMANENT) ACCOUNTS LIABILITIES Debit/DR Credit/CR Decrease Increase ? ? + ? Normal Balance CAPITAL/OWNERS' EQUITY Debit/DR Credit/CR Decrease Increase ? ? + ? Normal Balance ASSETS Debit/DR Credit/CR Increase Decrease + ? ? ? RETAINED EARNINGS Debit/DR Credit/CR Decrease Increase ? ? + ? Normal Balance REVENUES (and GAINS) Debit/DR Credit/CR Decrease Increase ? ? + ? Normal Balance EXPENSES (and LOSSES) Debit/DR Credit/CR Increase Decrease + ? ? ? NOMINAL ACCOUNTS Rules of Thumb If the "normal balance" for an account is a debit, then the account is increased by a debit and decreased by a credit. Contra Accounts have normal balances that are the opposite of their "parent" accounts. If the "normal balance" for an account is a credit, then the account is increased by a credit and decreased by a debit. Normal Balance =+ + Normal Balance 3-14 ILLUSTRATION 3-2 TRANSACTIONS AFFECTING THE EQUITY ACCOUNTS Ownership Structure Proprietorships and Partnerships Corporations Real (Permanent) Accounts Nominal (Temporary) Accounts Real (Permanent) Accounts Nominal (Temporary) Accounts Impact on Owners' Equity Transactions Affecting Owners' Equity Investment by Owner(s) Increase Capital Common Stock and related accounts Revenues Earned Increase Revenue Revenue Expenses Incurred Decrease Expense Capital Expense Withdrawal by Owner(s) Decrease Drawing Dividends Source: Kieso, Weygandt, and Warfield, Intermediate Accounting , 12th Edition Retained Earnings 3-15 ILLUSTRATION 3-3 THE ACCOUNTING CYCLE Identification and Measurement of Transactions and Other Events Reversing entries (optional) Post-closing trial-balance (optional) Closing (nominal accounts) Statement preparation Income statement Retained earnings Balance sheet Cash flows Journalization General journal Cash receipts journal Cash disbursements journal Purchases journal Sales journal Other special journals Posting General ledger (usually monthly) Subsidiary ledgers (usually daily) Work Sheet (optional) Trial balance preparation Adjustments Accruals Prepayments Estimated items Adjusted trial balance When the steps have been completed, the sequence starts over again in the next account period. Source: Kieso, Weygandt, and Warfield Intermediate Accounting, 12th Edition 3-16 ILLUSTRATION 3-4 SPECIAL JOURNALS Journal Transaction Recorded Sales All merchandise sales on account Purchases All merchandise purchases on account Cash Receipts All cash receipts (including sales) Cash Payments All cash payments (including purchases) 3-17 ILLUSTRATION 3-5 TYPES OF ADJUSTING ENTRIES Cash is Paid or Received PREPAYMENTS Asset ? Expense Original Entry Prepaid Insurance xx Cash xx Adjusting Entry Insurance Expense xx Prepaid Insurance xx Expense/Liability Adjusting Entry Salaries Expense xx Salaries Payable xx Subsequent Entry Salaries Payable xx Cash xx Asset/Revenue Interest Receivable xx Interest Revenue xx Cash xx Interest Receivable xx Liability ? Revenue Cash xx Unearned Rent Revenue xx Unearned Rent Revenue xx Rent Revenue xx ACCRUALS An Expense or Revenue is Recognized BEFORE AFTER OM_S Microsoft Word - KIESO.IAIM.cp03.v1.doc
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