Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 4 Accounting Information Systems 157

accounting equation: Assets = Liabilities + Stockholders’ Equity. Because of this double

equality, the system is referred to as the double-entry accounting system.

To summarize, each transaction is recorded under the rules shown in Exhibit 3.

Under these rules, the total debits will equal the total credits for each transaction,

because the equality of the debits and credits is built into the accounting equation:

Assets = Liabilities + Stockholders’ Equity.

The Journal

Each transaction is initially entered in chronological order in a record called a journal.

In this way, the journal documents the history of the company. The process of record-

ing transactions in the journal is called journalizing. The specific transaction record

entered in the journal is called a journal entry.

In practice, most journal entries are automated with the transaction processing sys-

tem. However, transactions that are unusual, correcting, or infrequent may require

manual entries. We stress manual entries in this text to help you understand the auto-

mated framework.

A business may use a variety of formats for recording journal entries. It may use one

all-purpose journal, sometimes called a general journal, or it may use several journals. In

the latter case, a special journalis designed to record a single kind of transaction that oc-

curs frequently. To simplify, we will use a basic, two-column general journal in the re-

mainder of this chapter to illustrate the manual journalizing of transactions.

Assume that on November 1, 2007, Janet Moore organizes a corporation that will

be known as Online Solutions. The first phase of Janet’s business plan is to focus on

building a service business that provides assistance to individuals and small businesses

in developing Web pages and in configuring and installing application software. Janet

Q.A credit balance in
which of the following
accounts—Cash,
Dividends, or Unearned
Revenue—would indicate
that an error had oc-
curred?

A.Dividends. If Cash has
a credit balance, the busi-
ness may have overdrawn
its bank account.

Exhibit 3

Rules of Debit and

Credit

ASSETS LIABILITIES STOCKHOLDERS’ EQUITY

CAPITAL STOCK/

RETAINED EARNINGS

   

Increased with Debits Increased with Credits Increased with Credits

Normal Debit Balance Normal Credit Balance Normal Credit Balance

DIVIDENDS



Increased with Debits

Normal Debit Balance

REVENUES



Increased with Credits

Normal Credit Balance

EXPENSES



Increased with Debits

Normal Debit Balance