Debits and Credits: Analyzing and Recording Business Transactions Chapter 2 2

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

Learning Unit 2-1 (The T Account) Standard account Ledger

Learning Unit 2-1 (The T Account) The Standard Account Form Account Title Account No. Date Item PR Debit Credit

Learning Unit 2-1 (The T Account) Each T account contains three basic parts. 1. Title of account 2. Left side Dr. (debit) 3. Right side Cr. (credit)

Learning Unit 2-1 (The T Account) Account Name (Title) Dr. (debit) 4,000 500 Cr. (credit) 300 400 Entries Footings 4,500 700 Balance 3,800 8

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

Learning Unit 2-2 (Recording Business Transactions) Assets = Liabilities + Owner’s Equity 11

Learning Unit 2-2 (Recording Business Transactions) Assets = Liabilities + Owner’s Equity Normal Balance Debit Debits + Credits – Normal Balance Credit Debits – Credits + Normal Balance Credit Debits – Credits +

Learning Unit 2-2 (Recording Business Transactions) Normal Balance Credit Debits – Credits + Capital Normal Balance Debit Debits + Credits – Withdrawals Owner's Equity

Learning Unit 2-2 (Recording Business Transactions) Normal Balance Credit Debits – Credits + Revenues Normal Balance Debit Debits + Credits – Expenses Owner's Equity

Balance Sheet Accounts Chart of Accounts Balance Sheet Accounts Assets 111 Cash 112 Accounts Receivable 121 Office Equipment Liabilities 211 Accounts Payable Owner’s Equity 311 Cathy Hall, Capital 312 Cathy Hall, Withdrawals

Income Statement Accounts Chart of Accounts Income Statement Accounts Revenue 411 Legal Fees Expenses 511 Salaries Expense 512 Rent Expense 513 Advertising Expense

The Transaction Analysis Step 1 Determine which accounts are affected. Step 2 Determine which category the accounts belong. Determine increases or decreases. Step 3 Step 4 What do the rules of debits and credits say? Step 5 What does the T account look like?

Applying the Transaction Analysis A. August 28: Cathy Hall invests $7,000 in cash and $800 of office equipment into the business. B. August 29: Law practice buys office equipment for cash, $900. C. August 30: Buys additional office equipment on account, $400.

Applying the Transaction Analysis Office Equipment 121 Cathy Hall, Capital 311 Cash 111 Accounts Payable 211 (A) 7,000 (A) 800 7,800 (A) 900 (B) (B) 900 400 (C) (C) 400

Applying the Transaction Analysis D. September 1-30: Cathy Hall provided legal services for cash, $3,000. E. September 1-30: Provided legal services on account, $4,000. F. September 1-30: Received $700 cash as partial payment from previous services performed on account. G. September 1-30: Paid salaries expense, $600.

Applying the Transaction Analysis Cash 111 Accts. Receivable 112 (A) 7,000 700 (F) (F) 700 900 (B) (E) 4,000 4,000 (E) (G) 600 600 (G) 3,000 (D) (D) 3,000 Salaries Expense 511 Legal Fees 411

Applying the Transaction Analysis H. September 1-30: Paid rent expense, $700. I. September 1-30: Incurred advertising expense of $300, to be paid next month.

Applying the Transaction Analysis Cash 111 Accounts Payable 211 (A) 7,000 (D) 3,000 (F) 700 900 (B) 600 (G) 400 (C) (I) 300 300 (I) (H) 700 700 (H) Rent Expense 512 Advertising Expense 513

Applying the Transaction Analysis J. September 1-30: Hall withdrew cash for personal use, $200. Cash 111 C. Hall Withdrawals, 312 (A) 7,000 (D) 3,000 (F) 700 (J) 200 200 (J) 900 (B) 600 (G) 700 (H)

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

Learning Unit 2-3 (The Trial Balance) Cash 111 (A) 7,000 (D) 3,000 (F) 700 10,700 8,300 900 (B) 600 (G) 700 (H) 200 (J) 2,400 Footings New Balance

Learning Unit 2-3 (The Trial Balance) Footings are used to obtain the balance of each side of every T account that has more than one entry. The ending balances are used to prepare a trial balance.

Learning Unit 2-3 (The Trial Balance) Cathy Hall, Attorney-at-Law Trial Balance September 30, 200x Cash Account No.111 Balance $$$ Balance $$$ Balance $$$ Cash $$$ Accounts Receivable $$$ Office Equipment $$$ Accounts Payable $$$ Cathy Hall, Capital $$$ Cathy Hall Withdrawals $$$ Legal Fees $$$ Salaries Expenses $$$ Rent Expense $$$ Advertising Expense $$$ Balance $$$ Balance $$$ Balance $$$ Balance $$$ Balance $$$ Balance $$$ Balance $$$

Learning Unit 2-3 (The Trial Balance) 111 Cash 112 Accounts Receivable 121 Office Equipment 211 Accounts Payable 311 Cathy Hall, Capital 312 Cathy Hall, Withdrawals 411 Legal Fees 511 Salaries Expense 512 Rent Expense 513 Advertising Expense Totals Dr. 8,300 3,300 2,100 200 600 700 300 15,500 Cr. 700 7,800 7,000 15,500

Preparing financial statements Learning Objective 4 Preparing financial statements from a trial balance. 4

Preparing the Financial Statements Cathy Hall, Attorney-at-Law Income Statement For Month Ended September 30, 200x Revenue: Legal fees $7,000 Operating expenses: Salaries expense $600 Rent expense 700 Advertising expense 300 Total operating expenses 1,600 Net income $5,400

Preparing the Financial Statements Cathy Hall, Attorney-at-Law Statements of Owner’s Equity For Month Ended September 30, 200x Cathy Hall, capital September 1, 200x $ 7,800 Net income for September $5,400 Less withdrawals 200 Increase in capital 5,200 Cathy Hall, capital, September 30, 200x $13,000

Preparing the Financial Statements Cathy Hall, Attorney-at-Law Balance Sheet September 30, 200x Assets Cash $ 8,300 Accts. rec. 3,300 Office equip. 2,100 Total $13,700 Liabilities and Owner’s Equity Accounts payable $ 700 Owner’s equity Cathy Hall, capital 13,000 Total $13,700

End of Chapter 2