1. Transactions That Affect Assets, Liabilities, and Owner’s Equity Making Accounting Relevant Accounting and finance professionals are key to every business operation. Making Accounting Relevant Accounting and finance professionals are key to every business operation. How might the work performed by the accountant affect the day-to-day decisions made by the business owner?

2. Section 1Accounts and the Double-Entry Accounting System What You’ll Learn  How to use T accounts.  Why you need a ledger.  The rules of debit and credit. What You’ll Learn  How to use T accounts.  Why you need a ledger.  The rules of debit and credit.

3. Why It’s Important The rules of debit and credit are the basis for entering transactions into the records of a business. Why It’s Important The rules of debit and credit are the basis for entering transactions into the records of a business. Section 1 Accounts and the Double-Entry Accounting System (cont'd.) Key Terms  ledger  chart of accounts  double-entry accounting  T account  debit  credit  normal balance Key Terms  ledger  chart of accounts  double-entry accounting  T account  debit  credit  normal balance

4. The Chart of Accounts A list of all the accounts and their assigned account numbers. The Chart of Accounts A list of all the accounts and their assigned account numbers. Section 1 Accounts and the Double-Entry Accounting System (cont'd.) Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230 CHART OF ACCOUNTS ASSETS101Cash in Bank 105Accounts Receivable--City News 110Accounts Receivable--Green Company 115Computer Equipment 120Office Equipment 125Delivery Equipment LIABILITIES201Accounts Payable--Beacon Advertising 205Accounts Payable--North Shore Auto OWNER’S EQUITY301Maria Sanchez, Capital 302Maria Sanchez, Withdrawals 303Income Summary REVENUE401Delivery Revenue EXPENSES501Advertising Expense 505Maintenance Expense 510Rent Expense 515Utilities Expense Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230 CHART OF ACCOUNTS ASSETS101Cash in Bank 105Accounts Receivable--City News 110Accounts Receivable--Green Company 115Computer Equipment 120Office Equipment 125Delivery Equipment LIABILITIES201Accounts Payable--Beacon Advertising 205Accounts Payable--North Shore Auto OWNER’S EQUITY301Maria Sanchez, Capital 302Maria Sanchez, Withdrawals 303Income Summary REVENUE401Delivery Revenue EXPENSES501Advertising Expense 505Maintenance Expense 510Rent Expense 515Utilities Expense

5. Double-Entry Accounting Double-entry accounting is a system of recordkeeping in which each business transaction affects at least two accounts. Double-Entry Accounting Double-entry accounting is a system of recordkeeping in which each business transaction affects at least two accounts. Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

6. T Accounts The T account, so called because of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction. T Accounts The T account, so called because of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction. Section 1 Accounts and the Double-Entry Accounting System (cont'd.) Account Name Left SideRight Side Debit SideCredit Side DebitCredit Account Name Left SideRight Side Debit SideCredit Side DebitCredit

7. The Rules of Debit and Credit  The rules of debit and credit vary according to whether an account is classified as an asset, a liability, or an owner’s capital account.  Normal balance is always on the side used to record increases to the account. The word normal used here means usual. The Rules of Debit and Credit  The rules of debit and credit vary according to whether an account is classified as an asset, a liability, or an owner’s capital account.  Normal balance is always on the side used to record increases to the account. The word normal used here means usual. Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

8. Rules for Asset Accounts Section 1 Accounts and the Double-Entry Accounting System (cont'd.) Assets Credit – (2) Decrease Side Debit + (1) Increase Side (3) Normal Balance

9. Rules for Liability and Owner’s Capital Accounts Section 1 Accounts and the Double-Entry Accounting System (cont'd.) Liabilities DebitCredit –+ (1) Increase Side (3) Normal Balance Debit – (2) Decrease Side Owner’s Equity DebitCredit –+ (2) Decrease (1) Increase Side (3) Normal Balance Credit + (1) Increase Side (3) Normal Balance

10. Check Your Understanding Explain why the normal balance of an asset account is on the debit side of the account. Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

11. Section 2Applying the Rules of Debit and Credit What You’ll Learn  How to analyze a transaction affecting assets, liabilities, and owner’s equity. What You’ll Learn  How to analyze a transaction affecting assets, liabilities, and owner’s equity. Why It’s Important You need to analyze transactions properly so that you record them correctly. Why It’s Important You need to analyze transactions properly so that you record them correctly.

12. Business Transaction Analysis: Steps to Success Business Transaction ANALYSIS Identify1.Identify the accounts affected. Classify2.Classify the accounts affected. + / -3.Determine the amount of increase or decrease for each account affected. Section 2Applying the Rules of Debit and Credit (cont'd.)

13. Business Transaction Analysis: Steps to Success (cont'd.) Business Transaction DEBIT-CREDIT RULE 4.Which account is debited? For what amount? 5.Which account is credited? For what amount? Section 2Applying the Rules of Debit and Credit (cont'd.)

14. Business Transaction Analysis: Steps to Success (cont'd.) Business Transaction T ACCOUNTS 6.What is the complete entry in T-account form? Section 2Applying the Rules of Debit and Credit (cont'd.) Account Name

15. Business Transaction Analysis Business Transaction 1 ANALYSIS Identify1.The accounts Cash in Bank and Maria Sanchez, Capital are affected. Classify2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s capital account. + / -3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.

16. Business Transaction Analysis (cont'd.) Business Transaction 1 (cont'd.) DEBIT-CREDIT RULE 4.Increases in asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5.Increases in the owner’s capital account are recorded as credits. Credit Maria Sanchez, Capital for $25,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.

17. Business Transaction Analysis (cont'd.) Business Transaction 1 (cont'd.) T ACCOUNTS 6. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. Maria Sanchez, Cash in Bank Capital Debit + 25,000 Credit + 25,000

18. Business Transaction Analysis (cont'd.) Business Transaction 3 ANALYSIS Identify1.The accounts Computer Equipment and Cash in Bank are affected. Classify2.Computer Equipment and Cash in Bank are asset accounts. + / –3.Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

19. Business Transaction Analysis (cont'd.) Business Transaction 3 (cont'd.) DEBIT-CREDIT RULE 4.Increases in asset accounts are recorded as debits. Debit Computer Equipment for $3,000. 5.Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $3,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

20. Business Transaction Analysis (cont'd.) Business Transaction 3 (cont'd.) T ACCOUNTS 6. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system. Computer EquipmentCash in Bank Debit + 3,000 Credit – 3,000

21. Business Transaction Analysis (cont'd.) Business Transaction 4 ANALYSIS Identify1.The accounts Delivery Equipment and Accounts Payable—North Shore Auto are affected. Classify2.Delivery Equipment is an asset account. Accounts Payable—North Shore Auto is a liability account. + / –3.Delivery Equipment is increased by $12,000. Accounts Payable— North Shore Auto is increased by $12,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

22. Business Transaction Analysis (cont'd.) Business Transaction 4 (cont'd.) DEBIT-CREDIT RULE 4.Increases in asset accounts are recorded as debits. Debit Delivery Equipment for $12,000. 5.Increases in liability accounts are recorded as credits. Credit Accounts Payable—North Shore Auto for $12,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

23. Business Transaction Analysis (cont'd.) Business Transaction 4 (cont'd.) T ACCOUNTS 6. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000. DeliveryAccounts Payable— EquipmentNorth Shore Auto Debit + 12,000 Credit + 12,000

24. Check Your Understanding In double-entry accounting, for each transaction there must be at least two entries. If you are increasing the Cash in Bank account, what other accounts might be affected? Section 2Applying the Rules of Debit and Credit (cont'd.)