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1.6: Account Wrap-Up

  • Page ID
    43058
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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:

    ACCOUNTS SUMMARY TABLE
    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
    Retained Earnings

    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

    This page titled 1.6: Account Wrap-Up is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.