THE RECORDING PROCESS

ACCOUNTING EQUATION
 THE ACCOUNT

The basic summary device of
accounting is the account. A separate
account is maintained for each element
that appears in the balance sheet (assets.
Liabilities, and equity) and in the income
statement (income and expenses) ,

Thus, an account may be defined as a detailed
record of increases, decreases and balance of each
element that appears in an entity’s financial
statements. The simplest form of the account is
known as the “T” account because of it’s
similarity to the letter “T”. The account has three
parts: account title, debit side (left side), credit
side (right side).
 Financial statements tell us how a business is performing.
They are the final products of the accounting process. But
how do we arrive at the items and amount that make up the
financial statements? The most basic tool of accounting is the
accounting equation. This equation presents the resources
controlled by the enterprise, the present obligation of the
enterprise and the residual interest in the assets. It states that
assets must always equal liabilities and owner’s equity.
 THE BASIC ACCOUNTING MODEL IS:
 ASSETS = LIABILITIES + OWNER’S
EQUITY
 Note that the assets are on the left side of the
equation opposite the liabilties and owner’s
equity. This explains why increases and
decreases in assets are recorded in the opposite
manner (mirror image) as liabilities and owner’s
equity are recorded. The equation also explains
why liabilties and owner’s equity follow the
same rules of debit and credit.
 The logic of debiting and crediting is related to
the accounting equation. Transactions may
require additions to both sides (left and right
sides), or an addition and subtraction on the
same side (left and right side), but in all cases the
equality must be maintained as
 ASSETS = LIABILITIES + OWNER’S
EQUITY
 Accounting is based in a double entry system which means
that the dual effects of a business transaction is recorded.
 A debit side entry must have a corresponding credit side
entry
 For every transaction, there must be one or more accounts
debited and one or more accounts credited.
 Each transaction affects at least two accounts.
 The total debits for every transaction must always equal the
total credits.
 An account is debited when amount is entered on
the left side of the account and credited when
amount is entered on the right side.
 THE ABBREVIATIONS FOR DEBIT AND
DEBIT ARE :
DR (FROM THE LATIN WORD DEBERE)
CR (FROM THE LATIN WORD CREDERE)
 BALANCE SHEET ACCOUNTS (REAL ACCOUNT)

ASSETS Libilities and owner's Equity

DEBIT CREDIT DEBIT CREDIT

       

+ - - +

INCREASES DECREASES DECREASES INCREASES

   

   

 NORMAL BAL       NORMAL BAL 

       

       
 The debit account title is entered first at the extreme left
margin in the “account titles and explanation column” and
the amount is recorded at the DEBIT side
 The credit account is indented and entered at the next line in
the “account titles and explanation column” and the amount
is recorded on the CREDIT side