Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 3 Applying Double-Entry Accounting

3-2 Learning Objective 1 Describe a T-account and its use in recording transactions. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The general ledger is a record containing all accounts used by the company. Cash Expenses Supplies LO1

3-3 Double-Entry Accounting An account balance is the difference between the increases and decreases in an account. LO1 $15,000 – 5,850 = $9,150

3-4 Liabilities Equity Assets =+ Expanded Accounting Equation Owner’s Capital Owner’s Capital Owner's Withdrawals Revenues Expenses ++ –– Remember we must always consider the accounting equation when recording transactions. LO1

3-5 Learning Objective 2 Define debits and credits and explain their role in double-entry accounting. A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Account title such as cash or supplies LO2

3-6 Liabilities Equity Assets =+ Double-Entry Accounting Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + Remember whenever we record a transaction debits will always equal credits. LO2

3-7 Revenues Expenses Owner’s Capital Owner’s Capital Owner's Withdrawals _ _ + + _ _ Debit Credit Owner’s Capital - + Debit Credit Owner's Withdrawals + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting Equity Notice that we must always consider the effect that an increase or decrease has on equity. LO2

3-8 Learning Objective 3 Post transactions in T-accounts. Analysis: 301 Posting: Assets increase with a debit. Capital increases with a credit. LO3

3-9 Analyzing Transactions Analysis: Posting: Assets increase with a debit. Assets decrease with a credit. LO3

3-10 Analyzing Transactions Analysis: Posting: Assets increase with a debit. Liabilities increase with a credit. LO3

3-11 Cash4,350$ Accounts receivable- Supplies9,720 Prepaid insurance2,400 Equipment26,000 Accounts payable6,200$ Unearned consulting revenue3,000 C. Taylor, Capital30,000 C. Taylor, Withdrawals200 Consulting revenue5,800 Rental revenue300 Salaries expense1,400 Rent expense1,000 Utilities expense230 Total45,300$ $ FastForward Trial Balance December 31, 2010 Learning Objective 4 Prepare and explain the use of a trial balance. On the trial balance we list all the accounts in our general ledger. The total of all our debit account balances must equal all our credit account balances. If this is not the case, we may have made an error posting one or more journal entries into the ledger. We cannot prepare the financial statement until the books are in balance as determined by the trial balance. LO4 DebitCredit

3-12 Learning Objective 5 Prepare Financial Statements from a trail Balance The income statement contains the revenues and expenses from the accounting period. This information will enable the owner to determine if they had a profit or loss. In this case there was a $3,470 profit. LO5

3-13 Statement of Owner's Equity LO5 We now are able to see how the owner’s equity has changed over the period. Take the beginning capital then add any investments made by the owner. Next we add the net income from the period (which we can get from the income statement). Then subtract any withdrawals the owner had made. You should now have the new capital balance.

3-14 Balance Sheet The balance sheet reports the financial position of a company at a particular point in time, usually at the end of a month, quarter or year. Notice that we get the new capital balance from the statement of owners equity. LO5

3-15 End of Chapter 3