1. Debits and Credits – Analyzing and Recording Business Transactions
Chapter 2 2

2. Setting up and organizing
Learning Objective 1
Setting up and organizing
a chart of accounts. 4

3. Business Transactions
Owner invests cash in a business.
Owner buys business assets.
Services are performed and cash received.
Services are performed and billed to customers as accounts receivable.
Business expenses are incurred and paid for with cash or paid for later. 4

4. Documenting Business Transactions
Analyze events (transactions).
Decide which accounts are affected.
Choose the account category.
Determine whether the event will cause an increase or decrease to the account.
Record the transaction with proper debits and credits. 5

5. Debits and Credits Every transaction must be recorded.
Every transaction must affect at least two accounts.
Debits must equal credits.
The accounting equation must be in balance. 6

6. Learning Unit 2-1
A T account is a format used to show the effect of transactions.
Dollar signs ($) are not used in accounts.
T account
Left Right
Debit Credit

7. Learning Unit 2-1 The Ledger Account Account: Cash Account: 1000
Balance
Date ref debit credit debit credit
June , ,000

8. Debits and Credits What is the definition of debit?
The left side of any T account.
A number entered on the left side of any account is said to be debited to an account.
What is the definition of credit?
The right side of any T account.
A number entered on the right side of any account is said to be credited to an account. 8

9. Right side/Cr. (credit)
Debits and Credits
Account Name (Title)
Left side/Dr. (debit)
Account Name (Title)
Right side/Cr. (credit) 8

10. Balancing an Account T accounts: Add each side (debit & credit side).
Foot the account by writing the numbers in small type at the bottom of each side.
Calculate the ending balance by subtracting the smaller side from the larger side.
Ledger accounts:
Some types contain a running balance. 10

11. Recording transactions in T accounts according to
Learning Objective 2
Recording transactions in
T accounts according to
the rules of debit and credit. 4

12. Assets = Liabilities + Owner’s Equity
Learning Unit 2-2
Recording Business Transactions: Debits and Credits
T accounts will be used.
Remember the accounting equation:
Assets = Liabilities + Owner’s Equity 11

13. Rules of Debit & Credit
A normal balance of an account is the increase side.*
Normal Balance
*Dr. (Debit)
assets
expenses
withdrawals
Account
Categories 12

14. Rules of Debit & Credit
A normal balance of an account is the increase side.*
Normal Balance
*Cr. (Credit)
liabilities
capital
revenue
Account
Categories 12

15. Chart of Accounts
This is a list of all accounts to be used by a business.
Each business entity has accounts which relate to its type of business activities.
Balance sheet accounts are assigned numbers beginning with a 1, 2, or 3.
Income statement account numbers start with either a 4 or a 5. 14

16. Chart of Accounts Balance Sheet Assets 1000 Cash
1020 Accounts Receivable
1030 Office Supplies
1040 Computer Equipment
1050 Office Equipment

17. Chart of Accounts Balance Sheet Liabilities 2000 Accounts Payable
Owner’s Equity
3010 Capital
3020 Withdrawals

18. Chart of Accounts Income Statement Revenue 4000 Service Revenue
Expenses
5010 Advertising Expense
5020 Rent Expense
5030 Utilities Expense
5040 Phone Expense
5050 Supplies Expense
5060 Insurance Expense
5070 Postage Expense

19. Clara J. Accounting Practice Example
Assets
1000 Cash $4,500
1020 Accounts Receivable
1030 Office Supplies
1040 Computer Equipment 1,200
1050 Office Equipment
Total $6,000

20. Clara J. Accounting Practice Example
Expenses
5010 Advertising Expense $ 300
5020 Rent Expense
5030 Utilities Expense
5040 Phone Expense
5050 Supplies Expense
5060 Insurance Expense
5070 Postage Expense
Total $ 900
Assets + Expenses $6,900

21. Clara J. Accounting Practice Example
Liabilities
2000 Accounts Payable $ 300
Owner’s Equity
3010 Capital ,000
3020 Withdrawals
Revenue
4000 Service Revenue 1,600
Total $6,900

22. Enter Transactions Example
During the month of July the following transactions took place.
Received a $155 telephone bill which will be paid later.
Paid $150 for insurance coverage.
Paid $200 for the supplies previously purchased.

23. Enter Transactions Example
Performed $850 of services on account.
Paid another $85 for the supplies previously purchased.

24. Enter Transactions Example
Debit Phone Expense and credit Accounts Payable which increases both accounts’ normal balances.
Phone Expense
g) 155
Accounts Payable
300
g) 155 20

25. Enter Transactions Example
Debit Insurance Expense and credit Cash which increases an expense and decreases an asset.
Insurance Expense
h) 150
Cash
4,500
h) 150

26. Enter Transactions Example
Debit Accounts Payable and credit Cash which decreases both accounts’ balances.
Accounts Payable
300
i) 200 g) 155
Cash
4,500 h) 150
i) 200

27. Enter Transactions Example
Debit Accounts Receivable and credit Revenue which increases the normal balance of both accounts.
Accounts Receivable
j) 850
Service Revenue
1,600
j) 850

28. Enter Transactions Example
Debit Accounts Payable and credit Cash which increases the normal balance of both accounts.
Accounts Payable
300
i) 200 g) 155
k) 85
Cash
4,500 h) 150
i) 200
k) 85

29. Preparing a trial balance.
Learning Objective 3
Preparing a trial balance. 4

30. Clara J. Accounting Practice
Learning Unit 2-3
Clara J. Accounting Practice
Trial Balance
Assets
1000 Cash $4,065
1020 Accounts Receivable
1030 Office Supplies
1040 Computer Equipment 1,200
1050 Office Equipment
Total $6,415

31. Clara J. Accounting Practice Trial Balance
Expenses
5010 Advertising Expense $ 300
5020 Rent Expense
5030 Utilities Expense
5040 Phone Expense
5050 Supplies Expense
5060 Insurance Expense
5070 Postage Expense
Total $1,205
Assets + Expenses $7,620

32. Clara J. Accounting Practice Trial Balance
Liabilities
2000 Accounts Payable $ 170
Owner’s Equity
3010 Capital ,000
3020 Withdrawals
Revenue
4000 Service Revenue 2,450
Total $7,620

33. Preparing financial reports
Learning Objective 4
Preparing financial reports
from a trial balance. 4

34. Clara J. Accounting Practice Income Statement
Year Ended July 31, 20xx
Revenues (fees earned) $2,450
Expenses:
Advertising Expense
Utilities and Telephone Expenses 355
Rent Expense
Insurance Expense ,205
Net Income $1,245

35. Clara J. Accounting Practice Statement of Owner’s Equity
Clara J., Capital, June 1, 200x $
Contribution Of Capital ,000
Net Income ,245
Clara J., Capital, July 31, 200x $ 6,245

36. Clara J. Accounting Practice Balance Sheet
July 31, 200x
Assets
Cash $4,065
Acct. Rec
Supplies
Equipment 1,200
Total Assets $6,415
Liabilities and Owner’s Equity
Accounts Payable $ 170
Owner’s Equity
Clara J., Capital 6,245
Total $6,415

37. End of Chapter 2