Account Balances

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Sub: Accounting                                                                             Topic: Assets

Account Balances
For many purposes, it is necessary to determine the balance in an account. This is accomplished by
adding the debits, credits, and determining the difference between the two sums. An account is
said to have a debit balance if the sum of the debit entries to that account exceeds the sum of the
credit entries. Conversely, an account has a credit balance if the sum of the credit entries exceeds the
sum of the debit entries. Asset accounts normally have debit balances inasmuch as these accounts
are increased by debiting. An asset account with a credit balance is no longer an asset. For example,
suppose the Accounts Receivable account had a credit balance. This would indicate that the
company owed money to its customers, and thus it is properly classified as a liability. Liability and
stockholders’ equity accounts normally have credit balances because these accounts are increased by
crediting. It is not possible to tell whether an account is an asset or a stockholder’s equity by merely
observing its balance. For example, accounts with credit balances may represent deductions from
assets rather than stockholders’ equities. Accounts with debit balances may represent deductions
from liabilities rather than assets. The fact that total debits were equal to total credits in the
illustrations is not due merely to chance or to the contrived nature of the examples. This equality
must always exist if the recording process is to be carried out correctly. Whenever the total debits
are not equal to total credits, it is certain that an error has been made. Testing the equality of the
debit and credit entries serves as a convenient device to detect mistakes.


Although the inequality of debits and credits always signals the presence of an error, the equality of
debits and credits does not assure the accuracy of the records. The range of errors that might be
disclosed by the equality test is quite broad. However, it discloses neither the omission of an entry
nor an entry to the wrong account. It is impossible to conceive of a transaction whereby an asset
would be increased and a liability decreased with no other changes. Any time that debits do not
equal credits, it follows that an error has been made. The choice to increase stockholders’ equity

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Sub: Accounting                                                                             Topic: Assets
accounts with credits given that asset accounts are increased with debits was not an arbitrary whim.
The convention was adopted to result in the equality of debits and credits for each transaction, a
desirable control feature. Up to this point we have to made entries in T-accounts, which are very
useful for learning how to record accounting entries. The T-account is related to an important
component of the recording system used in accounting practice— the ledger. The ledger is a
collection of accounts that is used to summarize the results of transactions so that the balance of
each account may be readily determined.




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Sub: Accounting                                                                             Topic: Assets

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