Review of the Accounting Process-Basic Model

Review of the Accounting Process

THE BASIC MODEL

The accounting information system is designed to collect and organize data into information that

is useful for stakeholders.

The Accounting Equation

The basic accounting equation is what drives double-entry bookkeeping. The equation reflects

the accounts reported in the balance sheet. The basic accounting equation is as follows:

ASSETS

=

LIABILITIES

+

OWNERS' EQUITY

This is a very simple algebraic equation that reflects that the assets of an entity must be

supported by either debt or equity. As in algebra if we add or subtract something from one side

of the equation we must add or subtract the same amount on the other side of the equation. For

example, if we were to increase cash (an asset) we might have to increase note payable (a

liability account) so that the basic accounting equation remains in balance.

ASSETS

=

LIABILITIES

$500 =

+

OWNERS' EQUITY

$500

In accounting language an increase in an asset account is called a debit and an increase in a

liability or equity account is called credit. Likewise, if we decrease in asset account we credit

the account and on the other side of the equation we debit a liability or equity account which

reduces its balance. The normal balance in an asset account is a debit. In contrast, to keep the

accounting equation in balance the normal balance in a liability or equity account is a credit. The

accounting equation provides the foundation for what eventually becomes the balance sheet.

T-Account Analysis

In double-entry bookkeeping, the terms debit and credit are used to identify which side of the

ledger account an entry is to be made. Debits are on the left side of the ledger and Credits are

on the right side of the ledger. It does not matter what type of account is involved.

For example if we received $500 in cash as a loan from the bank, the entry would be as follows:

CASH

Debit

$500

Credit

NOTE PAYABLE...