Page 69 - Accounting Principles (A Business Perspective)

2. Recording business transactions

To illustrate these rules, assume the same company received USD 1,000 cash from a customer for services
rendered (transaction 3). The Cash account, an asset, increases on the left (debit) side of the T-account; and the
Service Revenue account, an increase in retained earnings, increases on the right (credit) side.

(Dr.) Cash (Cr) (Dr.) Service Revenue (Cr)
(1) 10,000 (3) 1,000
(2) 5,000
(3) 1,000

Now assume this company paid USD 600 in salaries to employees (transaction 4). The Cash account, an asset,
decreases on the right (credit) side of the T-account; and the Salaries Expense account, a decrease in retained
earnings, increases on the left (debit) side. 8
(Dr) Cash (Cr) (Dr.) Salaries Expense (Cr)
(1) 10,000 (4) 600 (4) 600
(2) 5,000
(3) 1,000
Recording changes in dividends Since dividends decrease retained earnings, increases appear on the left
side of the Dividends account and decreases on the right side. Thus, the firm records payment of a USD 2,000 cash
dividend (transaction 5) as follows:
(Dr) Cash (Cr) (Dr.) Dividends 3 (Cr)
(1) 10,000 (4) 600 (5) 2,000
(2) 5,000 (5) 2,000
(3) 1,000

9
At the end of the accounting period, the accountant transfers any balances in the expense, revenue, and
Dividends accounts to the Retained Earnings account. This transfer occurs only after the information in the
expense and revenue accounts has been used to prepare the income statement. We discuss and illustrate this step in

Chapter 4.
To determine the balance of any T-account, total the debits to the account, total the credits to the account, and
subtract the smaller sum from the larger. If the sum of the debits exceeds the sum of the credits, the account has a
debit balance. For example, the following Cash account uses information from the preceding transactions. The
account has a debit balance of USD 13,400, computed as total debits of USD 16,000 less total credits of USD 2,600.
(Dr.) Cash (Cr)
(1) 10,000 (4) 600
(2) 5,000 (5) 2,000
(3) 1,000
16,000 2,600

Dr. bal 13,400

8 Certain deductions are normally taken out of employees' pay for social security taxes, federal and state
withholding, and so on. Those deductions are ignored here.
9 As we illustrate later in the text, some companies debt dividends directly to the Retained Earnings account

rather than to a Dividends account.

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