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Analyzing Business Transactions Using T Accounts

1.Set up T accounts for assets, liabilities, and owner’s equity. 2.Analyze business transactions and enter them in the accounts. 3. Determine the balance of an account. Transactions That Affect Assets, Liabilities, and Owner’s Equity Section Objectives

Asset, Liability, and Owner’s Equity Accounts Page 58

ANSWER: Accounts are written records of the assets, liabilities, and owner’s equity of a business. Page 58 QUESTION: What are accounts?

Accounts help to: analyze, record, classify, summarize, and report financial information. Page 58 Advantages of Accounts

Page 58 QUESTION: What is classification? ANSWER: Classification is a means of identifying each account as an asset, liability, or owner’s equity.

Classification of Accounts Page 58 Asset Accounts Asset accounts show the property a business owns. Liability Accounts Liability accounts show the debts of the business. Owner’s Equity Accounts Owner’s equity accounts show the owner’s financial interest in the business.

The Accounting Equation ASSETS The property a business owns LIABILITIES The debts of the business OWNER’S EQUITY The owner’s financial interest in the business = Page 58 +

Page 58 QUESTION: What is a T account? ANSWER: A T account is a type of account, resembling a T, used to analyze the effects of a business transaction.

=+ Page 58 T Accounts ASSETS + Record Increases LEFT SIDE - Record Decreases RIGHT SIDE LIABILITIES - Record Decreases LEFT SIDE + Record Increases RIGHT SIDE OWNER’S EQUITY - Record Decreases LEFT SIDE + Record Increases RIGHT SIDE

Set up T accounts for assets, liabilities, and owner’s equity. Page 58 Objective 1

Recording a Cash Investment Page 58

Page 58 Cash Account Cash + Record Increases LEFT SIDE - Record Decreases RIGHT SIDE Assets appear on the left side of the accounting equation. Cash is an asset. Cash increases appear on the left side of the Cash T account. Decreases are shown on the right side.

Page 59 Capital Account Linda Carter, Capital - Record Decreases LEFT SIDE + Record Increases RIGHT SIDE Owner’s equity appears on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). Increases appear on the right side of the T account. Decreases appear on the left side. Capital is an owner’s equity account.

Analyze business transactions and enter them in the accounts. Page 59 Objective 2

Effects of Business Transactions Page 59 1.Analyze the financial event. Use these steps to analyze the effects of the business transactions: 2.Apply the left-right rules for each account affected. 3.Make the entry in T-account form. Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account.

Business Transaction Page 59 Linda Carter withdrew $80,000 from personal savings and deposited it in the new business checking account for Carter Consulting Services. Analysis: (a) The asset account, Cash, is increased by $80,000. (b) The owner’s equity account, Linda Carter, Capital, is increased by $80,000.

Left-Right Rules Page 59 ASSETSOWNER’S EQUITY Record increases LEFTIncreases to asset accounts are recorded on the left side of the T account. RIGHTIncreases to owner’s equity accounts are recorded on the right side of the T account.

T-Account Presentation For what amount? Page 59 For what amount? Which T account has an entry on the left? Which T account has an entry on the right?

Page 59 (a) 80,000 (b) 80,000 CashLinda Carter, Capital T-Account Presentation

Recording a Cash Purchase of Equipment Page 59

Business Transaction Carter Consulting Services issued a $20,000 check to purchase a computer and other equipment. Analysis: (c) The asset account, Equipment, is increased by $20,000. (d) The asset account, Cash, is decreased by $20,000. Page 60

Page 60 Left-Right Rules ASSETS Record increases Record decreases ASSETS LEFTIncreases to asset accounts are recorded on the left side of the T account. RIGHTDecreases to asset accounts are recorded on the right side of the T account.

Page 60 T-Account Presentation For what amount? Which T account has an entry on the left? Which T account has an entry on the right?

Page 60 Equipment (c) 20,000 Cash (d) 20,000 T-Account Presentation

Reviewing the Effects of the Transactions Page 60 The Cash account shows two transactions. The initial investment by the owner (a) The cash purchase of equipment (d) Equipment (c) 20,000 Cash (d) 20,000 (a) 80,000

Recording a Credit Purchase of Equipment Page 60

Liabilities are amounts a business owes its creditors. They appear on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). Liabilities Page 60 Recall that when a purchase is made on account, a liability is created.

Business Transaction The firm bought office equipment for $15,000 on account from Office Plus. Analysis: (e) The asset account, Equipment, is increased by $15,000. (f) The liability account, Accounts Payable, is increased by $15,000. Page 60

Left-Right Rules Page 61 ASSETS LIABILITY Record increases LEFTIncreases to asset accounts are recorded on the left side of the T account. RIGHTIncreases to liability accounts are recorded on the right side of the T account.

Page 61 T-Account Presentation For what amount? Which T account has an entry on the left? Which T account has an entry on the right?

Page 61 Equipment (e) 15,000 Accounts Payable (f) 15,000 T-Account Presentation

Page 61 The Equipment account shows two transactions. The purchase of equipment for cash (c) The purchase of equipment on credit (e) (c) 20,000 (e) 15,000 Reviewing the Effects of the Transactions EquipmentAccounts Payable (f) 15,000

Recording a Cash Purchase of Supplies Page 61

Business Transaction Carter Consulting Services issued a check for $2,000 to Resource Supplies Inc. to purchase office supplies. Analysis: (g) The asset account, Supplies, is increased by $2,000. (h) The asset account, Cash, is decreased by $2,000. Page 61

Left-Right Rules ASSETS Record increases Record decreases Page 61 LEFTIncreases to asset accounts are recorded on the left side of the T account. RIGHTDecreases to asset accounts are recorded on the right side of the T account.

Page 62 T-Account Presentation For what amount? Which T account has an entry on the left? Which T account has an entry on the right?

Page 62 Supplies (g) 2,000 Cash (h) 2,000 T-Account Presentation

Reviewing the Effects of the Transactions Page 62 The Cash account shows three transactions: The initial investment by the owner (a) The cash purchase of equipment (d) The cash purchase of supplies (h) Supplies (g) 2,000 Cash (d) 20,000 (h) 2,000 (a) 80,000

Recording a Payment to a Creditor Page 63

Business Transaction Carter Consulting Services issued a check in the amount of $3,000 to Office Plus. Analysis: (i) The asset account, Cash, is decreased by $3,000. (j) The liability account, Accounts Payable, is decreased by $3,000. Page 63

Left-Right Rules Page 63 LIABILITYASSETS Record decreases LEFTDecreases to liability accounts are recorded on the left side of the T account. RIGHTDecreases to asset accounts are recorded on the right side of the T account.

Page 63 T-Account Presentation For what amount? Which T account has an entry on the left? Which T account has an entry on the right?

Page 63 Accounts Payable (j) 3,000 Cash (i) 3,000 T-Account Presentation

Reviewing the Effects of the Transactions Page 63 (a) 80,000 Cash (d) 20,000 (h) 2,000 (i) 3,000 (f) 15,000 Accounts Payable (j) 3,000 The Cash account shows four transactions: Initial investment (a) Equipment purchase (d) Supplies purchase (h) Payment on account (i)

Reviewing the Effects of the Transactions Page 63 (a) 80,000 Cash (d) 20,000 (h) 2,000 (i) 3,000 (f) 15,000 Accounts Payable (j) 3,000 The Accounts Payable account shows two transactions: Credit purchase of equipment (f) Payment to creditor (j)

Recording Prepaid Rent Page 63

Business Transactions Carter Consulting Services issued a check for $6,000 to pay rent for the months of December and January. Analysis: (k) The asset account, Prepaid Rent, is increased by $6,000. (l) The asset account, Cash, is decreased by $6,000. Page 63

Left-Right Rules Page 64 ASSETS Record increases Record decreases LEFTIncreases to asset accounts are recorded on the left side of the T account. RIGHTDecreases to asset accounts are recorded on the right side of the T account.

Page 64 T-Account Presentation For what amount? Which T account has an entry on the left? Which T account has an entry on the right?

Page 64 Prepaid Rent (k) 6,000 Cash (l) 6,000 T-Account Presentation

Reviewing the Effects of the Transactions Page 64 (d) 20,000 (h) 2,000 (i) 3,000 (l) 6,000 (a) 80,000 The Cash account shows five transactions: Initial investment (a) Equipment purchase (d) Supplies purchase (h) Payment on account (i) Advance rent payment (l) Prepaid Rent (k) 6,000 Cash

Account Balances Page 64

Determine the balance of an account. Page 64 Objective 3

Page 64 QUESTION: What is an account balance? ANSWER: An account balance is the difference between the amounts recorded on the two sides of an account.

Page 64 QUESTION: What is a footing? ANSWER: A footing is a small pencil figure written at the base of an amount column showing the sum of the entries in the column.

Calculating the Account Balance 1.Compute the totals of each side of the T account. Use footings for columns that have more than one entry. 2.Subtract the smaller total from the larger total. The result is the account balance. Page 64

the total of those entries is the account balance. an account contains entries on only one side, that amount is the balance.an account shows only one amount, the balance is recorded on the left side. the total on the left side is larger, the balance is recorded on the right side. the total on the right side is larger than the total on the left side, Recording Account Balances IF THEN Page 64

Account Balance Page 65 Cash (a)80,000(d) 20,000 (h) 2,000 (i) 3,000 (l) 6, ,000 Footing Bal. 49,000 (80,000 – 31,000)

Page 65 QUESTION: What is a normal balance? ANSWER: A normal balance is the increase side of an account.

Account balances for Carter Consulting Services ASSETS = LIABILITIES + OWNER’S EQUITY Cash Accounts Payable Linda Carter, Capital (a) 80,000 (d) 20,000 (j) 3,000 (f) 15,000 (b) 80,000 (h) 2,000 Bal. 12,000 (i) 3,000 (l) 6,000 Bal. 49,000 31,000 Supplies SUMMARY OF ACCOUNT BALANCES (g) 2,000 ASSETS = LIABILITIES + OWNER’S EQUITY Prepaid Rent 49,000 12,000 80,000 2,000 (k) 6,000 6,000 35,000 Equipment 92,000 = 12, ,000 (c) 20,000 (e) 15,000 Bal. 35,000 Page 65

REVIEWREVIEW accounts ____________ is a means of identifying each account as an asset, liability, or owner’s equity. Classification A _________ is a type of account, resembling a T, used to analyze the effects of a business transaction. T account Complete the following sentences: Written records of the assets, liabilities, and owner’s equity of a business are called _________.

REVIEWREVIEW A _______ is a small pencil figure written at the base of an amount column showing the sum of the entries in the column. account balance footing An account’s normal balance is the ________ side of the account. increase Complete the following sentences: The difference between the amounts recorded on the two sides of an account is called a(n) _______________.

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