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Presentation transcript:

That sounds a little confusing. Business Accounts An account is a location within an accounting system in which the increases and decreases in a specific asset, liability, or owner’s equity are recorded and stored. That sounds a little confusing. All the accounts of a business are grouped together in a ledger. A ledger is a book or a file containing a separate page for each business account. The ledger serves as a permanent record of financial transactions.

We should probably make this look a little more official. Chart of Accounts To keep track of its accounts, a business develops a Chart of Accounts. Let’s take another look at the list of accounts for Roadrunner Delivery Service Assets = Liabilities + Owner’s Equity Cash in Bank Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Accounts Payable M. Sanchez, Capital We should probably make this look a little more official.

Numbering the Chart of Accounts All Asset accounts begin with 1. Let’s see what the Roadrunner Delivery Service Accounts would look like. All Liability accounts begin with 2. All Owner’s Equity accounts begin with 3. All Revenue accounts begin with 4. All Expense accounts begin with 5.

Roadrunner Delivery Service Chart of Accounts Owner’s Equity Assets M. Sanchez, Capital M. Sanchez, Withdrawals Income Summary 101 105 110 115 120 125 Cash in Bank Accounts Receivable – City News Accounts Receivable – Green Company Computer Equipment Office Equipment Delivery Equipment 301 302 303 Revenue 401 Delivery Revenue Liabilities Expenses 501 505 510 515 Advertising Expense Maintenance Expense Rent Expense Utilities Expense 201 205 Accounts Payable – Beacon Advertising Accounts Payable – North Shore Auto

Terms You Need to Know Double-Entry Accounting A system of recordkeeping in which each business transaction affects at least two accounts. T Account Shows the dollar increase or decrease in an account that is caused by a transaction. It is called a T Account because it is shaped like a T.

Debit and Credit Debit Credit An amount entered on the left side of the T account. An amount entered on the right side of the T account. Let’s take a look at a T account. Credit means right side Debit means left side Account Name Left Side Right Side Debit Side Credit Side

Rules for Asset Accounts An asset account is increased on the debit side. An asset account is decreased on the credit side. The normal balance for an asset account is the debit side. Increase on the left side Decrease on the right side Asset Account Debit Side Credit Side + - Normal balance on the debit side Normal Balance

Rules for Liability Accounts A liability account is increased on the credit side. A liability account is decreased on the debit side. The normal balance for a liability account is the credit side. Decrease on the left side Increase on the right side Liability Account Debit Side Credit Side - + Normal balance on the credit side Normal Balance

Rules for Owner’s Equity Accounts An owner’s equity account is increased on the credit side. An owner’s equity account is decreased on the debit side. The normal balance for an owner’s equity account is the credit side. Decrease on the left side Increase on the right side Owner’s Equity Account Debit Side Credit Side - + Normal balance on the credit side Normal Balance

Summary of Rules for Debits and Credits = + Asset Account Liability Account Owner’s Equity Account Debit Side Credit Side Debit Side Credit Side Debit Side Credit Side + - - + - + Normal Balance Normal Balance Normal Balance Let’s review the basic accounting equation. Hey, the accounts on the left side of the equation are increased on the left side, and the accounts on the right side of the equation are increased on the right side. The normal balance side is the increase side

Debits and Credits for Business Transactions That’s very important. Don’t forget it! Before we can apply the rules of debits and credits to business transactions, there is one very important rule that needs to be pointed out. Balance Daniel Son… Balance. For every debit there must be a credit of equal value.

Homework Textbook Page: 77 Workbook Page: 34 Problem 4-1

Investments by the Owner Business Transaction 1 Maria Sanchez took $25,000 from her personal savings and deposited that amount to open a business account in the name of Roadrunner Delivery Service. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Cash in Bank and M. Sanchez, Capital Cash in Bank is an asset account and M. Sanchez, Capital is an owner’s equity account Cash in Bank is increased by $25,000 and M. Sanchez, Capital is increased by $25,000 Asset accounts are increased on the debit side and owner’s equity accounts are increased on the credit side Debits equal credits Cash in Bank M. Sanchez, Capital + - - + = 25,000 Debit 25,000 Credit 25,000 25,000

Additional Investments by the Owner Business Transaction 2 The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Office Equipment and M. Sanchez, Capital Office Equipment is an asset account and M. Sanchez, Capital is an owner’s equity account Office Equipment is increased by $400 and M. Sanchez, Capital is increased by $400 Asset accounts are increased on the debit side and owner’s equity accounts are increased on the credit side Debits equal credits Office Equipment M. Sanchez, Capital + - - + = 400 Debit 400 Credit 400 400

Cash Payment Transactions Business Transaction 3 Roadrunner issued a $3,000 check to purchase a computer system. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Computer Equipment and Cash in Bank Computer Equipment is an asset account and Cash in Bank is an asset account Computer Equipment is increased by $3,000 and Cash in Bank is decreased by $3,000 Asset accounts are increased on the debit side and asset accounts are decreased on the credit side Debits equal credits Office Equipment Cash in Bank + - + - = 3,000 Debit 3,000 Credit 3,000 3,000

Buying on Credit Transactions Business Transaction 4 Roadrunner bought a used truck on account from North Shore Auto for $12,000. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Delivery Equipment and Accounts Payable Delivery Equipment is an asset account and Accounts Payable is a liability account Delivery Equipment is increased by $12,000 and Accounts Payable is increased by $12,000 Asset accounts are increased on the debit side and liability accounts are increased on the credit side Debits equal credits Delivery Equipment Acct Pay – North Shore Auto + - - + = 12,000 Debit 12,000 Credit 12,000 12,000

Selling on Credit Transactions Business Transaction 5 Roadrunner sold one telephone to Green Company for $200 on account. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Accounts Receivable and Office Equipment Accounts Receivable is an asset account and Office Equipment is an asset account Accounts Receivable is increased by $200 and Office Equipment is decreased by $200 Asset accounts are increased on the debit side and asset accounts are decreased on the credit side Debits equal credits Acct Rec – Green Co Office Equipment + - + - = 200 Debit 200 Credit 200 200

Credit Payment Transactions Business Transaction 6 Roadrunner issued a check for $350 in partial payment of the amount owed to its creditor, North Shore Auto. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Cash in Bank and Accounts Payable Cash in Bank is an asset account and Accounts Payable is a liability account Cash in Bank is decreased by $350 and Accounts Payable is decreased by $350 Asset accounts are decreased on the credit side and liability accounts are decreased on the debit side Debits equal credits Cash in Bank Acct Pay – North Shore Auto + - + - = 350 Credit 350 Debit 350 350

Credit Receivable Transactions Business Transaction 7 Roadrunner received and deposited a check for $200 from Green Company. The check received was full payment for the telephone sold on account in transaction 5. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Cash in Bank and Accounts Receivable Cash in Bank is an asset account and Accounts Receivable is an asset account Cash in Bank is increased by $200 and Accounts Receivable is decreased by $200 Asset accounts are increased on the debit side and asset accounts are decreased on the credit side Debits equal credits Acct Rec – Green Co Cash in Bank + - + - = 200 Debit 200 Credit 200 200

Summary of Debit and Credit Transactions (1) 25,000 3,000 (3) (2) 400 200 (5) (6) 350 12,000 (4) (7) 200 350 (6) Bal 200 11,650 Bal Bal 21,850 (4) 12,000 25,000 (1) 400 (2) Bal 12,000 (5) 200 200 (7) 25,400 Bal Bal ------ Total Debits Total Credits = 37,050 37,050 (3) 3,000 Assets Liabilities Owner’s Equity = + Bal 3,000 37,050 11,650 25,400

Homework Textbook Page: 91 & 92 Workbook Page: 37 Problem 4-6

Problem 4 - 1 That was easy Asset Debit Credit Debit Asset Debit Liability Credit Debit Credit Asset Debit Credit Debit Owner’s Equity Credit Debit Credit That was easy

Problem 4-5 = = + (1) 45,000 85 (3) (3) 85 (5) 3,000 8,500 (2) (8) 100 (1) 45,000 85 (3) (3) 85 (5) 3,000 8,500 (2) (8) 100 3,000 (5) Bal 85 5,500 Bal 1,500 (7) Bal 40,515 (2) 8,500 45,000 (1) 200 (4) Bal 8,500 (6) 200 100 (8) 45,200 Bal Bal 100 Total Debits Total Credits = 50,700 50,700 (4) 200 200 (6) Assets Liabilities Owner’s Equity (7) 1,500 = + 50,700 5,500 45,200 Bal 1,500

Homework Textbook Page: 89 & 90 Workbook Page: 35 Problem 4-4