Remember that the balance sheet is simply a detailed statement of the accounting equation. Assets = Liabilities + Stockholders' Equity. In the columns to the right, you can see balance sheets for Bromley's Tudedo Rentals and Bromley's Formal Wear. If you add up the the liabilities and stockholders' equity amounts you will see that that amount equals the total of the assets.
An accounting system includes a separate record for each item that appears in the balance sheet.
- For example, a separate record is kept for the asset cash showing all increases and decreases in cash which result from the many transactions involving cash.
- These records are called ledger accounts.
- All of the records are collectively called a ledger.
- Today most general ledgers are managed by computer programs.
- Each ledger account is a separate record.
- Regardless of which computer program your accounting department uses, it is essential to understand the accounting concepts involving debit and credits and how they affect balance sheet accounts.
In its simplest form an account has only three elements:
- A title, consisting of the name of a particular asset, liability or stockholders' equity.
- A left side, which is called the "debit side"
- A right side, which is called the "credit side"
- This form of account is called a T Account" because it resembles the letter"T"
|Title of Account|
|Left or Debit side||Right or Credit side|
- An amount recorded on the left or debit side of an account is called a "Debit" or a debit entry.
- An amount recorded on the right or credit side is called a "Credit" or a credit entry.
- Accountants use the words debit and credit as verbs.
- The act of recording an entry on the left-hand side of the account is called "debiting".
- The act of recording an entry on the right side of an account is called "crediting".
- If there are both debit and credit entries to an account, the balance in the account represents the difference between the two amounts.
- If the debit side has a greater number, then the account has a debit balance.
- If the credits are greater than the debits, then the account has a credit balance.
- All asset accounts normally have debit balances.
- Liabilities and stockholders' equity have credit balances.
Click on the link above called "Principles of Debits and Credits" and print it out. You will find this document invaluable when completing the tutorials and exercises.
Click on the link above called "Debit and Credit Tutorial for Balance Sheet Accounts"
When finished with the tutorial, click on the link for Debit and Credit Balance Sheet Accounts Exercise.