Quick Review
Quick Review Of Terms & Concepts
Let’s reflect a little on what we’ve covered so far. In prior lessons we:
- Discussed the types of business organizations, types of business activities, users of financial information, bookkeeping systems, accounting rules, and the cash and accrual basis of accounting.
- Introduced you to some of the terminology and definitions used in the accounting and bookkeeping language.
- Explained the Accounting Equations, double entry bookkeeping, and how business transactions affect the equation.
- Introduced and explained Debits and Credits and how they affect the Accounting Equation and are used to record business transactions.
If you feel you need a refresher on any of these topics now would be a good time to review any prior lessons before continuing on.
Important Terms & Concepts
Let's get ready for recording transactions in future lessons by reviewing some important terms and concepts.
Account -a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period. Any detail type of asset, liability, equity, revenue, and expense accounts that our business needs or wants to track have their own separate and individual account.
Major Types or Groups Of Accounts
Assets - Liabilities - Owner's Equity - Revenue - Expense - Draws
A | L | OE | |||
| | Assets | | Liabilities | | Owner's Equity | |||
| | _____ | R | E | D | ||
| Revenue | Expense | Draws | |||
The above diagram is made up of two terms ALOE and RED. These are the basis for the acronym
ALOE-RED which helps us remember the major types of accounts. ALOE-represents Assets, Liabilities, and Owner's Equity. RED-represents Revenues, Expenses, and Draws/Dividends.
Associate these terms with a day at the beach when you get a RED sunburn and use ALOE (the ointment) to ease the pain.
Detail Accounts
Detail Accounts are the accounts that are actually used to record a business's transactions. Some examples are Cash, Accounts Receivable, Accounts Payable, Sales, Utility Expense, Rent, etc.
Chart Of Accounts
The Chart of Accounts is a codedl listing of all the detail accounts in the General Ledger.
Accounting Equation is also referred to as the Balance Sheet Equation.
The equation may be expressed in three forms:
1. Abbreviated or Simple Version:
Property = Property Rights
2. Expanded Version:
Assets = Liabilities + Owner’s Equity (Capital)
3. Fully Expanded Version:
Assets = Liabilities + Beginning Owner’s Equity (Capital) + Additional Owner Investments + Revenues – Expenses – Draws
Debits and Credits
Rules for Debits and Credits that we will use in the next Lesson were just covered. If you’ve slept since then, the following procedure is what you use in order to use and apply the Debit and Credit Rules when recording bookkeeping transactions.
Debit Credit Equation = Assets + Expenses + Draws = Liabilities + Beginning Equity + Revenue
How To Use and Apply The Debit and Credit Rules:
(1) Determine the type of account(s) the transactions affect-asset, liability, revenue, or expense account.
(1) Determine the type of account(s) the transactions affect-asset, liability, revenue, or expense account.
(2) Determine the Account's Normal Balance
(3) Determine if the transaction increases or decreases the account’s balance.
(4) Apply the debit and credit rules based on the type of account, its normal balance, and whether the balance of the account will increase or decrease.The Normal Balance Of An Account determines whether a Debit or Credit Increases an Account's Balance.
Debit and Credit Rule
If the Normal Balance Side of an Account is the Left Side - Debit Side a Debit increases the balance of the Account. If the Normal Balance Side of an Account is the Right Side - Credit Side a Credit increases the balance of the Account.
Additional Explanation
In other words,
If the Normal Balance of an Account is a Debit (Left Side), enter the amount on the Left Side as a Debit to Increase the Account's Balance.
- Assets
- Draws
- Expenses
What does a Credit Do ? The opposite of course, enter the amount on the Right Side as a Credit to Decrease the Account's Balance.
If the Normal Balance of an Account is a Credit (Right Side), enter the amount on the Right Side as a Credit to Increase the Account's Balance.
- Liability
- Owner's Equity
- Revenue
What does a Debit Do ? The opposite of course, enter the amount on the Left Side as a Debit to Decrease the Account's Balance.
Debit and Credit Rules Table
| Debit and Credit Table | |||
| Type Of Account | Normal Balance | Increases | Decreases |
| Assets | Debit-Left Side | Debit-Left Side | Credit-Right Side |
| Liabilities | Credit-Right Side | Credit-Right Side | Debit-Left Side |
| Owner's Equity | Credit-Right Side | Credit-Right Side | Debit-Left Side |
| Revenue | Credit-Right Side | Credit-Right Side | Debit-Left Side |
| Expense | Debit-Left Side | Debit-Left Side | Credit-Right Side |
| Draws | Debit-Left Side | Debit-Left Side | Credit-Right Side |
