Accounting for a Service Business Unit 1.4 Balance Sheet Accounts

Accounts The transaction analysis sheet introduced in the last unit show how the balance sheet changes as a result of daily transactions The use of this type of sheet is somewhat impractical due to the volume of the transactions An Account is a separate set of changes for each balance sheet item

The “T” Account For every item on the balance sheet, a separate account is used As the name implies, the account template is shaped like a “T” Account Title Left Side Debit Right Side Credit

Debit and Credit The right side of a account is called the Debit side; and the left side is the Credit “T” accounts are often used by accountants as rough calculations when analyzing transactions As Assets are located on the left side of the Balance Sheet; their opening balance is listed as a debit on the respective accounts

Balance Sheet Assets CashAccounts Receivable SuppliesLand 6, ,000 25,000

Debits and Credits (continued) As Liabilities and Owner’s Equity accounts are recorded on the right hand side of the balance sheet, their balances are recorded on the right side of a T account Accounts Payable R. Miller, Capital 4,68092,800

Introducing Ledgers A Ledger is a group of accounts Each account has a separate heading The ending balances of each account make up the balance in the Ledger These Ledger totals are then used to produce a Balance Sheet

Opening the Ledger Place the account name in the middle of each account Record the date and opening balance from the balance sheet on the appropriate side in the account Total debit balances must equal total credit balances – known as having the ledger in balance

Recording Transactions in Accounts Follow these steps in analyzing transactions and recording them in accounts:  Determine which accounts change in value as a result of the transaction (note: two or more accounts will change in value  Identify the type of account that has changed. Is the account an asset, a liability or an owner’s equity account  Decide whether the change is an increase or a decrease in the account  Decide whether the change is recorded as a debit or credit in the account

Transaction Analysis Accounts increase on the same side as they appear on the balance sheet and they decrease on the opposite side  If assets increase, the amount is recorded on the debit side  If assets decrease, the amount is recorded on the credit side  If liabilities or owner’s equity increase the amount is recorded on the credit side  If liabilities or owner’s equity decrease, the amount is recorded on the debit side

Exercise to Try Page 51, #1 and 3 Dominicana Restaurant

Calculating New Balances in the Accounts The difference between the totals of the two sides of an account is called the account balance The account balance is placed on the side of the account with the highest total To determine the new account balance, the following calculations are made for each account: Add up the debit side of the account Add up the credit side of the account Subtract the smaller amount from the larger and place the answer on the larger side of the account. This is the new balance for the account

Preparing a Trial Balance A trial balance is prepared to verify that the total debits are still equal to the total credits in the ledger The trial balance is a list of the ledger account balances. The total of the debit balances should equal the total of the credit balances. The trial balance indicates the mathematical accuracy of the ledger Two columns are required – the first is used to record the debit balances and the second column is used to record the credit balances It is an informal statement compared to the balance sheet which is considered a formal financial statement

Limitations of the Trial Balance It makes sure that the principle of double entry accounting was followed – verifies that a debit amount was recorded for each credit amount However, the trial balance does not indicate if the wrong accounts were used to record a transaction  Note: when the amount is placed on the opposite side of the account the error double the original amount

Preparing a New Balance Sheet A new Balance Sheet is prepared from the information contained on the trial balance See Page 49 – Goldman’s Gym

GAAP – key ideas  Double entry accounting – the total of the debit amounts must always equal the total of the credit amounts  Assets – are located on the left side of the balance sheet. Asset accounts increase on the debit side and decrease on the credit side  Liabilities and Owner’s Equity – are located on the right side of the balance sheet. Liability and owner’s equity accounts increase on the credit side and decrease on the debit side  Trial Balance - proves the mathematical accuracy of the ledger. It does not indicate that transactions were all correctly recorded as debits and credits