The very first step in classifying information for accounting purposes is to understand the normal balance of an account. Journal entries are prepared following the guidelines for each type of account.
The balance sheet accounts are: Assets, Liabilities, and Capital. An account's normal balance appears on the side of the account where it increases, whether debit or credit, that's the side where its balance is positive. Assets are called debit-balance accounts because their balance increases with a debit. Liabilities are called credit-balance accounts because their balance decreases with a credit.
Sometimes accounts have a balance that is not a normal balance, part of the reconciling process is to identify these balances and determine the reason that generated that balance and make it correct. For example, when a checking account is overdrawn, it has to be corrected by making an entry that transfers that short-term liability to where it belongs in this case to Liabilities where the normal balance is a credit.
The normal balances of accounts are as follows:
Owner's Equity: Overall, credit. It is important to keep in mind that Owner's Equity is the result of adding to Capital the Revenues and Subtracting the Withdrawals and Expenses.
Assets: Normal balance is debit
Liabilities: Normal balance is credit
Owner’s Equity: Normal balance is credit
Revenues: Normal balance is credit
Expenses: Normal balance is debit.
A journal It is a chronological record of a business’ transactions. The Journalizing process has four steps:
- Identify the transactions and its data.
- Identify each account affected by the transaction and classify each account by type
- Determine whether each account has increased or decreased by the transaction. Keep in mind the rules of debit and credit to determine whether to debit or credit the account
- Enter the account into the journal, including a brief explanation for the journal entry.