1.6: Account Wrap-Up
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The discussion to this point has included all five types of accounts. Asset, Liability, and Stockholders’ Equity are accounts that appear on the balance sheet. Revenue and Expense are accounts reported on the income statement.
There is a hybrid version of these account types called contra accounts. The normal balance of a contra account is intentionally the opposite of the normal balance for a particular account classification. For example, a contra asset account has a credit balance instead of the normal debit balance for an asset account. A contra revenue account has a debit balance instead of the normal credit balance for a revenue account. This allows a company to continue to report an original amount by not making any changes directly to an account. Instead, an alternative contra account is used to report any changes. The original account and its contra account(s) are presented together on the financial statements to show original amount, total amount of changes, and the net result of the two (which is called carrying or net amount).
To recap, here is a list of the seven steps in the accounting cycle that we have covered to this point. Assume here that financial statements will be prepared at the end of each month.
ACTION | WHEN | YOUR JOB | |
1. | Journalize transactions | Daily | THINK; analyze transactions |
2. | Post to ledgers | Daily | COPY from journal; CALCULATE |
3. | Income statement | End of month | COPY from ledgers; CALCULATE |
4. | Retained earnings statement | End of month | COPY from ledgers and income statement; CALCULATE |
5. | Balance sheet | End of month | COPY from ledgers and retained earnings statement; ADD |
6. | Journalize closing entries | End of month | THINK; same three entries |
7. | Post closing entries to ledgers | End of month | COPY from journal; CALCULATE |
The accounting cycle involves numerous steps, yet many of them are simple copying and calculating—procedures that may be tedious, but not difficult. For the seven steps in the accounting cycle discussed so far, five of them primarily involve only copying and/or calculating.
THINKING is involved when making journal entries—you have to analyze what is happening and translate the transaction into accounting language by selecting accounts to debit and credit. You often have to calculate amounts as well. This is involved in steps #1 and #6. However, closing entries are the same three every time, so they should become relatively routine.
The following table summarizes the rules of debit and credit and other facts about the accounts that you know so far:
ACCOUNT TYPE | ACCOUNTS | TO INCREASE | TO DECREASE | NORMAL BALANCE | FINANCIAL STATEMENT | CLOSE OUT? |
Asset | Cash Accounts Receivable Land Truck Equipment Building Furnishings |
debit | credit | debit | Balance Sheet | NO |
Liability | Accounts Payable Note Payable |
credit | debit | credit | Balance Sheet | NO |
Stockholders’ Equity |
Common Stock |
credit | debit | credit | Balance Sheet | NO |
Contra Stockholders’ Equity | Cash Dividends | credit | debit | credit | Retained Earnings Statement |
NO |
Revenue | Fees Earned | credit | debit | credit | Income Statement | YES |
Expense | Wages Expense Rent Expense Utilities Expense Supplies Expense Insurance Expense Advertising Expense Maintenance Expense Miscellaneous Expense |
debit | credit | debit | Income Statement | YES |