# PARACCOUNTANT Association of Canada THE ACCOUNTING PUZZLE Learning accounting is like trying to put together a 1,000 piece puzzle without the benefit of.

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PARACCOUNTANT Association of Canada THE ACCOUNTING PUZZLE Learning accounting is like trying to put together a 1,000 piece puzzle without the benefit of the picture on the front of the box. To rectify this problem we have created the “picture” for accounting. Refer to this picture every time you analyze a business transaction. Use the Page Down key to advance through the presentation and the Page Up key to go back a step.

PARACCOUNTANT Association of Canada Before we begin we’ll have a short quiz. Press the Page Down key to reveal the question, decide on an answer and then press the Page Down key to reveal the answer. Which is better, a Debit or a Credit? Neither!! They are opposites to each other just like left and right, up and down, in and out, positive and negative. 2 + 3 x 4 = ? 2 + 3 x 4 = 14 (Order of Operations) Multiplication and Division before Addition and Subtraction

PARACCOUNTANT Association of Canada The purpose of the first question was to dispel any preconceived notions that a Debit is better than a Credit or a Credit is better than a Debit. They are only a way of causing an amount to go up or an amount to go down. If an account has a Debit balance, a Debit entry will make it go up and a Credit entry will make it go down. If an account has a Credit balance, a Credit entry will make it go up and a Debit entry will make it go down. Now let’s look at the Accounting Puzzle

PARACCOUNTANT Association of Canada Assets (Things you own)

PARACCOUNTANT Association of Canada Assets Cash in Bank Accounts Receivable Vehicle Equipment

PARACCOUNTANT Association of Canada AssetsLiabilities (Money you owe) Cash in Bank Accounts Receivable Vehicle Equipment

PARACCOUNTANT Association of Canada AssetsLiabilities Accounts Payable Bank Loan Cash in Bank Accounts Receivable Vehicle Equipment

PARACCOUNTANT Association of Canada AssetsLiabilities Equity (Net worth) Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan

PARACCOUNTANT Association of Canada AssetsLiabilities Equity Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital

PARACCOUNTANT Association of Canada AssetsLiabilities Equity Revenue (Earnings) Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital

PARACCOUNTANT Association of Canada AssetsLiabilities Equity Revenue Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses (Costs Incurred) Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned Advertising Bank Charges Vehicle Expense

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBIT BALANCECREDIT BALANCE Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned Advertising Bank Charges Vehicle Expense Debit increases the balance Credit decreases the balance Credit increases the balance Debit decreases the balance Balance Sheet Income Statement The balance in these accounts at a specific point in time (ie: December 31) The accumulated change in these accounts over a period of time (ie: month or year) Assets = Liabilities + Equity Revenue – Expenses = Net Income TOTAL DEBITS = TOTAL CREDITS

PARACCOUNTANT Association of Canada Only memorization will help you remember where an account belongs in the puzzle (account type: Asset, Liability, Equity, Revenue or Expense) and whether an account’s normal balance is a Debit or a Credit. To help you practice the following screen will test you. Do the following: 1.Press the Page Down key to reveal the Account Name. 2.Decide what the Account Type should be. 3.Press the Page Down key to reveal the Account Type. 4.Decide what the Normal Balance should be. 5.Press the Page Down key to reveal the Normal Balance. Practice this test until you get 100%.

PARACCOUNTANT Association of Canada ACCOUNT NAMEACCOUNT TYPENORMAL BALANCE Accounts PayableLiabilityCredit Accounts ReceivableAssetDebit Bookkeeping Fees EarnedRevenueCredit Advertising ExpenseExpenseDebit Cash in BankAssetDebit Bank ChargesExpenseDebit VehicleAssetDebit Bank LoanLiabilityCredit Consulting Fees EarnedRevenueCredit Owner’s CapitalEquityCredit Vehicle ExpenseExpenseDebit EquipmentAssetDebit If you did not get 100% on this test, use the Page Up key to return to the Puzzle and try again!!!

PARACCOUNTANT Association of Canada CONGRATULATIONS!! If you are looking at this screen you have passed the test 100% error free. We stress this because the Account Names, Types and Normal Balances are used again and again. In fact, the puzzle is the foundation on which all your future accounting lessons are built. Make sure that foundation is strong!!!

PARACCOUNTANT Association of Canada Business Transactions and T-Accounts To illustrate the effect of business transactions on the different accounts we post “General Journal Entries to “T-Accounts”. DATEACCOUNTTYPEDEBITCREDIT January 2Cash in Bank (increase)ASSET50,000 Owner Capital (increase)EQUITY50,000 Explanation: Investment by Owner The following is a General Journal Entry to record the receipt, by the business, of \$50,000 from the Owner. Just as you may keep a “Diary” or “Journal” to record the day’s events, in bookkeeping we keep a journal to record any business transactions. There are five main components to a “General Journal Entry”, the Date, Account, Type, Amount and Explanation. Notice that total Debits = total Credits

PARACCOUNTANT Association of Canada We will now create several General Journal Entries and post them to “T-Accounts” to see, over time, what the effects will be on the General Ledger Accounts. The following screen shows the T-Accounts we will use for this exercise. “T-Accounts” represent “Ledger Cards”. The left side of the “T-Account” is used to enter Debit amounts. The right side of the “T-Account” is used to enter Credit amounts as follows: Cash in Bank DEBITSCREDITS

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 2Cash in Bank (increase)ASSET50,000 Owner Capital (increase)EQUITY50,000 Explanation: Investment by Owner An investment of \$50,000 to the business from the owner.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 2Vehicle (increase)ASSET20,000 Cash in Bank (decrease)ASSET20,000 Explanation: Bought and paid for an automobile The business purchases an automobile for \$20,000.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 2Equipment (increase)ASSET1,000 Cash in Bank (decrease)ASSET1,000 Explanation: Bought and paid for Office Equipment The business purchases Office Equipment for \$1,000.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 2Advertising (increase)EXPENSE500 Accounts Payable (increase)LIABILITY500 Explanation: Purchased advertising on account The business purchases \$500 worth of Advertising on account and will pay for it later.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 10Accounts Receivable (increase)ASSET2,000 Consulting Fees (increase)REVENUE2,000 Explanation: Did the work and didn’t get paid The business earns \$2,000 in consulting fees and sends the bill to the client who will pay later.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 11Vehicle expense (increase)EXPENSE100 Accounts Payable (increase)LIABILITY100 Explanation: Purchase gasoline on account The business purchases \$100 worth of Gas for the vehicle on account and will pay for it later.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 12Accounts Receivable (increase)ASSET1,500 Bookkeeping Fees (increase)REVENUE1,500 Explanation: Did the work and didn’t get paid The business earns \$1,500 in bookkeeping fees and sends the bill to the client who will pay later.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 15Cash in Bank (increase)ASSET1,500 Bank Loan (increase)LIABILITY1,500 Explanation: Borrowed money from the Bank The business borrows \$1,500 from the bank

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 20Cash in Bank (increase)ASSET2,000 Accounts Receivable (decrease)ASSET2,000 Explanation: Received money owed from client bill of January 10. Received the \$2,000 for the consulting fees earned and billed on the January 10 th.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500 2,000 eliminates

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 20Accounts Payable (decrease)LIABILITY500 Cash in Bank (decrease)ASSET500 Explanation: Paid bill for advertising dated January 2. Paid the \$500 for the advertising from January 2 nd.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500 2,000 500 eliminates

PARACCOUNTANT Association of Canada DATEACCOUNTTYPEDEBITCREDIT January 31Bank Charges (increase)EXPENSE25 Cash in Bank (decrease)ASSET25 Explanation: Record Bank Charge Recorded the \$25 bank charge on the statement.

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500 2,000 500 25

PARACCOUNTANT Association of Canada Now that we have completed all the transactions, we need to come up with the total Debits and total Credits for each of the accounts as follows:

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500 2,000 500 25 53,50021,5251,000 50,000500 3,5002,0005006001,50025 20,0001,5002,000100

PARACCOUNTANT Association of Canada For accounts that have an amount for total Debits and an amount for total Credits we must determine whether the final balance is a Debit balance or a Credit balance. We do this by subtracting the smaller amount from the larger amount which will leave the amount on the correct side of the “T” as follows:

PARACCOUNTANT Association of Canada Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Consulting Fees Advertising Bank Charges Vehicle Expense 50,000 20,000 1,000 500 2,000 100 1,500 2,000 500 25 53,50021,525 1,000 50,000500 3,5002,0005006001,50025 20,0001,5002,000100 - 21,525 31,975 - 2,000 1,500 - 500 100

PARACCOUNTANT Association of Canada The next step is to create a “Trial Balance”, using the final amounts for each account, to make sure that total Debits equals total Credits as follows:

PARACCOUNTANT Association of Canada ACCOUNTDEBITCREDIT Cash in Bank31,975 Accounts Receivable1,500 Vehicle20,000 Equipment1,000 Accounts Payable100 Bank Loan1,500 Owner Capital50,000 Bookkeeping Fees1,500 Consulting Fees2,000 Advertising500 Bank Charges25 Vehicle Expense100 TOTALS55,100 TRIAL BALANCE Use the Page Up and then Page Down keys to go back and forth from here to the T-Accounts.

PARACCOUNTANT Association of Canada Now that we have confirmed that the total Debits amount equals the total Credits amount we can use the Trial Balance to create three Financial Statements. First, let’s divide the Trial Balance into its components.

PARACCOUNTANT Association of Canada ACCOUNTDEBITCREDIT Cash in Bank31,975 Accounts Receivable1,500 Vehicle20,000 Equipment1,000 Accounts Payable100 Bank Loan1,500 Owner Capital50,000 Bookkeeping Fees1,500 Consulting Fees2,000 Advertising500 Bank Charges25 Vehicle Expense100 TOTALS55,100 REVENUE EXPENSES ASSETS LIABILITIES EQUITY TRIAL BALANCE

PARACCOUNTANT Association of Canada The first Financial Statement is the Income Statement which is also referred to as the Statement of Earnings.

PARACCOUNTANT Association of Canada REVENUE: Bookkeeping Fees\$ 1,500 Consulting Fees2,000 TOTAL REVENUE\$ 3,500 EXPENSES: Advertising\$ 500 Bank Charges25 Vehicle Expenses100 TOTAL EXPENSES625 NET INCOME\$ 2,875 We will need the “Net Income” amount of \$2,875 for the next statement. INCOME STATEMENT REVENUE – EXPENSES = NET INCOME

PARACCOUNTANT Association of Canada The second Financial Statement is the Statement of Change in Owner’s Equity.

PARACCOUNTANT Association of Canada Owner Capital at the Beginning\$ 0 Plus:Owner Investments\$50,000 Net Income2,87552,875 \$ 52,875 Less:Owner Withdrawals\$ 0 Net Loss00 Owner Capital at the End\$ 52,875 We will need the “Owner Capital at the End” amount of \$52,875 for the next statement. STATEMENT OF CHANGE IN OWNER’S EQUITY In reality, a company has either a Net Income or a Net Loss. It can never have both. Also, the Owner Withdrawals account will be discussed later.

PARACCOUNTANT Association of Canada The third Financial Statement is the Balance Sheet which is also referred to as the Statement of Financial Position.

PARACCOUNTANT Association of Canada BALANCE SHEET Assets: Cash in Bank\$ 31,975 Accounts Receivable1,500 Vehicle20,000 Equipment1,000 Total Assets\$ 54,475 Liabilities: Accounts Payable\$ 100 Bank Loan1,500 Total Liabilities\$ 1,600 Owner’s Equity52,875 Total Liabilities & Equity\$ 54,475 Notice that the “Total Assets” amount is equal to the “Total Liabilities & Equity” amount. ASSETS = LIABILITIES + EQUITY

PARACCOUNTANT Association of Canada BOOKKEEPING QUIZ The following is a quiz to see if you remembered all the important issues for your foundation. Press the Page Down key to reveal the question, decide on an answer, then press the Page Down key to reveal the answer.

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS What are the account types?

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS Cash in Bank Accounts Receivable Vehicle Equipment Name four Assets.

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Name two Liabilities.

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Name an Equity.

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned Name two Revenues.

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned Advertising Bank Charges Vehicle Expense Name three Expenses.

PARACCOUNTANT Association of Canada AssetsLiabilities Equity RevenueExpenses DEBITSCREDITS Cash in Bank Accounts Receivable Vehicle Equipment Accounts Payable Bank Loan Owner Capital Bookkeeping Fees Earned Consulting Fees Earned Advertising Bank Charges Vehicle Expense Balance Sheet Income Statement What are the row headings?

PARACCOUNTANT Association of Canada What is the Balance Sheet equation? ASSETS = LIABILITIES + EQUITY What is the Income Statement equation? REVENUE – EXPENSES = NET INCOME

PARACCOUNTANT Association of Canada Name the five components of a General Journal Entry. Date, Account, Type, Amount and Explanation Name the three Financial Statements in order. 1.Income Statement 2.Statement of Change in Owner’s Equity 3.Balance Sheet

PARACCOUNTANT Association of Canada Congratulations!! If you have successfully completed this instruction and fully understand the concepts you are ready to advance to the next level of bookkeeping.

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