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

Business Transactions Owner invests cash in a business. Owner buys business assets. Services are performed and cash received. Services are performed and billed to customers as accounts receivable. Business expenses are incurred and paid for with cash or paid for later. 4

Documenting Business Transactions Analyze events (transactions). Decide which accounts are affected. Choose the account category. Determine whether the event will cause an increase or decrease to the account. Record the transaction with proper debits and credits. 5

Debits and Credits Every transaction must be recorded. Every transaction must affect at least two accounts. Debits must equal credits. The accounting equation must be in balance. 6

Learning Unit 2-1 A T account is a format used to show the effect of transactions. Dollar signs ($) are not used in accounts. T account Left Right Debit Credit

Learning Unit 2-1 The Ledger Account Account: Cash Account: 1000 Balance Date ref. debit credit debit credit June 1 5,000 5,000

Debits and Credits What is the definition of debit? The left side of any T account. A number entered on the left side of any account is said to be debited to an account. What is the definition of credit? The right side of any T account. A number entered on the right side of any account is said to be credited to an account. 8

Right side/Cr. (credit) Debits and Credits Account Name (Title) Left side/Dr. (debit) Account Name (Title) Right side/Cr. (credit) 8

Balancing an Account T accounts: Add each side (debit & credit side). Foot the account by writing the numbers in small type at the bottom of each side. Calculate the ending balance by subtracting the smaller side from the larger side. Ledger accounts: Some types contain a running balance. 10

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

Assets = Liabilities + Owner’s Equity Learning Unit 2-2 Recording Business Transactions: Debits and Credits T accounts will be used. Remember the accounting equation: Assets = Liabilities + Owner’s Equity 11

Rules of Debit & Credit A normal balance of an account is the increase side.* Normal Balance *Dr. (Debit) assets expenses withdrawals Account Categories 12

Rules of Debit & Credit A normal balance of an account is the increase side.* Normal Balance *Cr. (Credit) liabilities capital revenue Account Categories 12

Chart of Accounts This is a list of all accounts to be used by a business. Each business entity has accounts which relate to its type of business activities. Balance sheet accounts are assigned numbers beginning with a 1, 2, or 3. Income statement account numbers start with either a 4 or a 5. 14

Chart of Accounts Balance Sheet Assets 1000 Cash 1020 Accounts Receivable 1030 Office Supplies 1040 Computer Equipment 1050 Office Equipment

Chart of Accounts Balance Sheet Liabilities 2000 Accounts Payable Owner’s Equity 3010 Capital 3020 Withdrawals

Chart of Accounts Income Statement Revenue 4000 Service Revenue Expenses 5010 Advertising Expense 5020 Rent Expense 5030 Utilities Expense 5040 Phone Expense 5050 Supplies Expense 5060 Insurance Expense 5070 Postage Expense

Clara J. Accounting Practice Example Assets 1000 Cash $4,500 1020 Accounts Receivable 1030 Office Supplies 300 1040 Computer Equipment 1,200 1050 Office Equipment Total $6,000

Clara J. Accounting Practice Example Expenses 5010 Advertising Expense $ 300 5020 Rent Expense 400 5030 Utilities Expense 200 5040 Phone Expense 5050 Supplies Expense 5060 Insurance Expense 5070 Postage Expense Total $ 900 Assets + Expenses $6,900

Clara J. Accounting Practice Example Liabilities 2000 Accounts Payable $ 300 Owner’s Equity 3010 Capital 5,000 3020 Withdrawals Revenue 4000 Service Revenue 1,600 Total $6,900

Enter Transactions Example During the month of July the following transactions took place. Received a $155 telephone bill which will be paid later. Paid $150 for insurance coverage. Paid $200 for the supplies previously purchased.

Enter Transactions Example Performed $850 of services on account. Paid another $85 for the supplies previously purchased.

Enter Transactions Example Debit Phone Expense and credit Accounts Payable which increases both accounts’ normal balances. Phone Expense g) 155 Accounts Payable 300 g) 155 20

Enter Transactions Example Debit Insurance Expense and credit Cash which increases an expense and decreases an asset. Insurance Expense h) 150 Cash 4,500 h) 150

Enter Transactions Example Debit Accounts Payable and credit Cash which decreases both accounts’ balances. Accounts Payable 300 i) 200 g) 155 Cash 4,500 h) 150 i) 200

Enter Transactions Example Debit Accounts Receivable and credit Revenue which increases the normal balance of both accounts. Accounts Receivable j) 850 Service Revenue 1,600 j) 850

Enter Transactions Example Debit Accounts Payable and credit Cash which increases the normal balance of both accounts. Accounts Payable 300 i) 200 g) 155 k) 85 Cash 4,500 h) 150 i) 200 k) 85

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

Clara J. Accounting Practice Learning Unit 2-3 Clara J. Accounting Practice Trial Balance Assets 1000 Cash $4,065 1020 Accounts Receivable 850 1030 Office Supplies 300 1040 Computer Equipment 1,200 1050 Office Equipment Total $6,415

Clara J. Accounting Practice Trial Balance Expenses 5010 Advertising Expense $ 300 5020 Rent Expense 400 5030 Utilities Expense 200 5040 Phone Expense 155 5050 Supplies Expense 5060 Insurance Expense 150 5070 Postage Expense Total $1,205 Assets + Expenses $7,620

Clara J. Accounting Practice Trial Balance Liabilities 2000 Accounts Payable $ 170 Owner’s Equity 3010 Capital 5,000 3020 Withdrawals Revenue 4000 Service Revenue 2,450 Total $7,620

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

Clara J. Accounting Practice Income Statement Year Ended July 31, 20xx Revenues (fees earned) $2,450 Expenses: Advertising Expense 300 Utilities and Telephone Expenses 355 Rent Expense 400 Insurance Expense 150 1,205 Net Income $1,245

Clara J. Accounting Practice Statement of Owner’s Equity Clara J., Capital, June 1, 200x $ 0 Contribution Of Capital 5,000 Net Income 1,245 Clara J., Capital, July 31, 200x $ 6,245

Clara J. Accounting Practice Balance Sheet July 31, 200x Assets Cash $4,065 Acct. Rec. 850 Supplies 300 Equipment 1,200 Total Assets $6,415 Liabilities and Owner’s Equity Accounts Payable $ 170 Owner’s Equity Clara J., Capital 6,245 Total $6,415

End of Chapter 2