The Account

Gabriel A. Listianto, Ph.D., Ak.

Undergraduate Accounting Progam. Sanata Dharma University.

Accounting in Action
The Account
An account is an individual accounting record of increases and decreases in
a specific asset, liability, or equity item.
In its simplest form, an account consists of three parts: (1) a title, (2) a left
or debit side, and (3) a right or credit side. Because the format of an account
resembles the letter T, we refer to it as a T-account.

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Debits and Credits
The term debit indicates the left side of an account, and credit indicates the
right side. The terms are commonly abbreviated as Dr. for debit and Cr. for
credit.
Debit and Credit do not mean increase or decrease, as is commonly
thought. The terms debit and credit will be used repeatedly in the recording
process to describe where entries are made in accounts.
For example, the act of entering an amount on the left side of an account is
called debiting the account. Making an entry on the right side is crediting
the account.

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Debits and Credits
When comparing the totals of the two sides, an account shows a debit
balance if the total of the debit amounts exceeds the credits.
An account shows a credit balance if the credit amounts exceed the debits.

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DEBIT AND CREDIT PROCEDURE
Remember that each transaction must affect two or more accounts to keep
the basic accounting equation in balance.
In other words, for each transaction, debits must equal credits. The equality
of debits and credits provides the basis for the double-entry system of
recording transactions.
Under the double-entry system, the dual (two-sided) effect of each
transaction is recorded in appropriate accounts. This system provides a
logical method for recording transactions.

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DR./CR. PROCEDURES FOR ASSETS AND LIABILITIES

Asset accounts normally show debit balances. That is, debits to a specific
asset account should exceed credits to that account.
Likewise, liability accounts normally show credit balances. That is, credits
to a liability account should exceed debits to that account.
The normal balance of an account is on the side where an increase in the
account is recorded.

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DR./CR. PROCEDURES FOR ASSETS AND LIABILITIES

Debit and credit effects – assets and liabilities

Normal balances – assets and liabilities

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EQUITY
There are five subdivisions of equity;
1. share capital – ordinary,
2. retained earnings,
3. dividends,
4. revenues,
5. expenses.

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SHARE CAPITAL – ORDINARY
Companies issue share capital – ordinary in exchange for the owners’
investment paid in to the company.
Credits increase the Share Capital – Ordinary account, and debits decrease
it.
Share Capital – Ordinary accounts normally show credit balances. That is,
credits to a share capital – ordinary account should exceed debits to that
account.

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SHARE CAPITAL – ORDINARY
Debit and credit effects – share capital – ordinary

Normal balance – share capital – ordinary

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RETAINED EARNINGS
Retained earnings is net income that is kept (retained) in the business.
Retained earnings represents the portion of equity that the company has
accumulated through the profitable operation of the business.
Credits (net income) increase the Retained Earnings account, and debits
(dividends or net losses) decrease it.

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RETAINED EARNINGS
Debit and credit effects and normal balance – retained earnings

Normal balance – retained earnings

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REVENUES
The purpose of earning revenues is to benefit the shareholders of the
business.
When a company earns revenues, equity increases.
Revenues are a subdivision of equity that provides information as to why
equity increased.
Credits increase revenue accounts and debits decrease them.
Therefore, the effect of debits and credits on revenue accounts is the same
as their effect on equity.

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REVENUES
Debit and credit effects and normal balance – revenues

Normal balance – revenues

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EXPENSES
Expenses have the opposite effect: expenses decrease equity.
Since expenses decrease net income, and revenues increase it, it is logical
that the increase and decrease sides of expense accounts should be the
reverse of revenue accounts.
Thus, debits increase expense accounts, and credits decrease them.

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Expenses
Debit and credit effects and normal balance – expenses

Normal balance – expenses

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DIVIDENDS
A dividend is a company’s distribution to its shareholders.
The most common form of a distribution is a cash dividend.
Dividends reduce the shareholders’ claims on retained earnings.
Debits increase the Dividends account, and credits decrease it.

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DIVIDENDS
Debit and credit effects and normal balance – dividends

Normal balance – dividends

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EQUITY RELATIONSHIP
Companies report share capital – ordinary and retained earnings in the
equity section of the statement of financial position.
Companies report dividends on the retained earnings statement. And
Companies report report revenues and expenses on the income statement.
Dividends, revenues, and expenses are eventually transferred to retained
earnings at the end of the period.
As a result, a change in any one of these three items affects equity.

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EQUITY RELATIONSHIP

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Summary of Debit/Credit Rules

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Source:
Weygandt, J.J., Kimmel, P.D., and Kieso, D.E. 2013. Financial Accounting IFRS
Edition. 2nd Ed. John Wiley & Sons, Inc.

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