Journalizing

JOURNALIZIN
G
◦ An account is an individual accounting record of
increases and decreases in a specific asset, liability,
or owner’s equity item. For example, Softbyte (the
THE company discussed earlier) would have separate

accounts for Cash, Accounts Receivable, Accounts
ACCOUNT Payable, Service Revenue, Salaries and Wages
Expense, and so on. (Note that whenever we are
referring to a specific account, we capitalize the
name.)
◦ 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. (basic
form of account)
THE
ACCOUNT
◦ The term debit indicates the left side of an account,
and credit indicates the right side. They are
commonly abbreviated as Dr. for debit and Cr. for
credit. They do not mean increase or decrease, as is
DEBITS AND commonly thought. We use the terms debit and

credit repeatedly in the recording process to
CREDITS 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.
◦ 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.
◦ The procedure of recording debits and credits in an account for the

transactions affecting the Cash account of Softbyte is shown below.
DEBITS AND
CREDITS
◦ Every positive item in the tabular summary represents a
receipt of cash. Every negative amount represents a
DEBITS AND payment of cash. Notice that in the account form, we

record the increases in cash as debits and the decreases
CREDITS in cash as credits.
◦ For example, the ₱15,000 receipt of cash (in blue) is
debited to Cash, and the – ₱7,000 payment of cash (in
red) is credited to Cash. Having increases on one side
and decreases on the other reduces recording errors and
helps in determining the totals of each side of the
DEBITS AND account as well as the account balance. The balance is
determined by netting the two sides (subtracting one
CREDITS amount from the other). The account balance, a debit of
₱8,050, indicates that Softbyte had ₱8,050 more
increases than decreases in cash. In other words,
Softbyte started with a balance of zero and now has
₱8,050 in its Cash account.
DEBITS AND CREDITS
◦ 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 and also helps ensure the
accuracy of the recorded amounts as well as the detection of errors. If every transaction is recorded with
equal debits and credits, the sum of all the debits to the accounts must equal the sum of all the credits.
DEBITS AND CREDITS
◦ Softbyte, increases in Cash—an asset—are entered on the left side, and decreases in Cash are entered on
the right side. We know that both sides of the basic equation (Assets = Liabilities + Owner’s Equity)
must be equal. It therefore follows that increases and decreases in liabilities have to be recorded opposite
from increases and decreases in assets. Thus, increases in liabilities are entered on the right or credit side,
and decreases in liabilities are entered on the left or debit side. The effects that debits and credits have on
assets and liabilities are show below.
DEBITS AND CREDITS
◦ 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.
DEBITS AND CREDITS
◦ Owner’s investments and revenues increase owner’s equity. Owner’s drawings and expenses decrease
owner’s equity. Companies keep accounts for each of these types of transactions.
DEBITS AND CREDITS
◦ Owner’s Capital. Investments by owners are credited to the Owner’s Capital account. Credits increase
this account, and debits decrease it. When an owner invests cash in the business, the company debits
(increases) Cash and credits (increases) Owner’s Capital. When the owner’s investment in the business is
reduced, Owner’s Capital is debited (decreased).
DEBITS AND CREDITS
◦ Owner’s Drawings. An owner may withdraw cash or other assets for personal use. Withdrawals could be
debited directly to Owner’s Capital to indicate a decrease in owner’s equity. However, it is preferable to use a
separate account, called Owner’s Drawings. This separate account makes it easier to determine total
withdrawals for each accounting period. Owner’s Drawings is increased by debits and decreased by credits.
Normally, the drawings account will have a debit balance.
◦ The Owner’s Drawings account decreases owner’s equity. It is not an income statement account like revenues
and expenses.
DEBITS AND CREDITS
◦ Revenues and Expenses. The purpose of earning revenues is to benefi t the owner(s) of the business.
When a company recognizes revenues, owner’s equity increases. Therefore, the effect of debits and
credits on revenue accounts is the same as their effect on Owner’s Capital. That is, revenue accounts are
increased by credits and decreased by debits. Expenses have the opposite effect. Expenses decrease
owner’s equity.
SUMMARY OF DEBIT/CREDIT RULES
JOURNALIZING
THE RECORDING PROCESS
◦ Although it is possible to enter transaction information directly into the accounts, few businesses do so.
◦ Practically every business uses the basic steps in the recording process:
1. Analyze each transaction in terms of its effect on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
THE JOURNAL
◦ Companies initially record transactions in chronological order (the order in which they occur). Thus, the
journal is referred to as the book of original entry. For each transaction, the journal shows the debit and
credit effects on specific accounts. Companies may use various kinds of journals, but every company has
the most basic form of journal, a general journal. Typically, a general journal has spaces for dates,
account titles and explanations, references, and two amount columns.
◦ The journal makes several significant contributions to the recording process:
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be
easily compared.
JOURNALIZING
◦ Entering transaction data in the journal is known as journalizing. Companies make separate journal
entries for each transaction. A complete entry consists of (1) the date of the transaction, (2) the accounts
and amounts to be debited and credited, and (3) a brief explanation of the transaction.
JOURNALIZING
1. The date of the transaction is entered in the Date column.
2. The debit account title (that is, the account to be debited) is entered first at the extreme left margin
of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in
the Debit column.
3. The credit account title (that is, the account to be credited) is indented and entered on the next line
in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in
the Credit column.
4. A brief explanation of the transaction appears on the line below the credit account title. A space is
left between journal entries. The blank space separates individual journal entries and makes the
entire journal easier to read.
5. The column titled Ref. (which stands for Reference) is left blank when the journal entry is made.
This column is used later when the journal entries are transferred to the individual accounts.
SIMPLE AND COMPOUND ENTRIES
◦ Some entries involve only two accounts, one debit and one credit. This type of entry is called a simple
entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires
three or more accounts is a compound entry. To illustrate, assume that on July 1, Butler Company
purchases a delivery truck costing ₱14,000. It pays ₱8,000 cash now and agrees to pay the remaining
₱6,000 on account (to be paid later). The compound entry should be:
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JOURNALIZIN

THE company discussed earlier) would have separate

DEBITS AND commonly thought. We use the terms debit and

◦ The procedure of recording debits and credits in an account for the

DEBITS AND payment of cash. Notice that in the account form, we

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