Book 1 - Chapter 21

Discussion Questions and Brief Exercises for Learning Goals 20–21

An account is a detailed historical record that shows all the increases, decreases, and balance of
a specific item in the accounting equation.

a.	Asset: left side
b.	Liability: right side
c.	Owner’s equity: right side
d.	Revenue: right side
e.	Expense: left side

Increases are recorded on the “normal” (the positive) side of an account. Examples: Cash is increased with a left-side entry. Accounts Payable is increased with a right-side entry. Expenses are increased with a left-side entry.

Decreases are recorded on the opposite side from increases. Examples: Cash is decreased with a right-side entry. Accounts Payable is decreased with a left-side entry. Expenses are decreased with a right-side entry.

The rules for increase and decrease state that any item on the left side of the equation is increased with a left-side entry, and any item on the right side of the equation is increased with a right-side entry. Decreases are simply the opposite. Therefore, whether a right-side or left-side entry increases or decreases an item depends on the side of the equation where the item is located. Assets are on the left side of the equation, so right-side entries decrease assets. Liabilities are on the right side of the equation, so right-side entries increase liabilities. Likewise, because assets are on the left of the equation, left-side entries increase assets. Because liabilities are on the right side of the equation, left-side entries decrease liabilities.


Beginning balance

Ending balance

Cash
7,000
7,50	2,00
2,000
9,550


(Notice that $ signs are not used.)


Beginning balance

Ending balance

Accounts Payable

2,900	34,00
2,000	15,00
9,550	2,000

There are two reasons for recording revenues and expenses in their own accounts, separate from the owner’s capital account. First, it simply becomes too crowded and unmanageable to record all revenue and expense transactions in a single account. Second, recording in separate accounts makes it possible to see and analyze each separate item. In this way, the accounts provide a better understanding of what is happening with revenues and expenses.

Expense increases are recorded on the left of side of accounts (the normal side for an expense account) because an expense is really a decrease in owner’s equity. All decreases in owner’s equity are recorded with left-side entries. Revenue increases are recorded on the right side of accounts (the normal side for a revenue account) because revenues are increases in owner’s equity. All increases in owner’s equity are recorded with right-side entries.

Learning Goal 21

SOLUTIONS

Learning Goal 21: Use the Owner’s Capital Accounts

Home

Home || Book Publications || Professor’s Office || Student Info & Resources || Useful Links

Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include the balance sheet, the income statement, financial ratios, and bank reconciliation.