The Accounting for Job Order Costing
Recording journal entries and posting them to general ledger accounts in a managerial cost accounting system isn’t difficult. Because almost all accounts in managerial accounting are either assets or expenses, debits increase most balances and credits decrease balances. Accordingly, a T-account lists increases in the debit column to the left and decreases in the credit column to the right.
Accountants use journal entries to record any changes to these T-accounts. Journal entries record transactions — namely, transfers between different accounts. Therefore, each journal entry affects at least two accounts, and total debits (increases to the left) must equal total credits (decreases to the right).
For example, to purchase $1,000 worth of raw materials, debit the account Raw materials inventory (an increase to the left) and credit the account Cash (a decrease in cash to the right).
Assume the company started with $10,000 worth of cash. Post this journal entry to the accounts, debiting the Raw materials inventory account for $1,000 (increasing to the left) and crediting the Cash account for $1,000 (decreasing to the right). This entry reduces Cash by $1,000 while increasing Raw materials inventory by $1,000.
As taught in financial accounting courses, the debit-credit system actually features two different kinds of accounts — so-called debit accounts and credit accounts. So far in this section, you use debits (to the left side) to increase debit accounts and use credits (to the right side) to decrease debit accounts.
However, credit accounts, which include Liabilities, Stockholders’ equity, and Revenue accounts, work in the opposite direction. To increase these accounts, credit them (to the right side). To decrease them, you debit them (to the left side).