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Section 2Applying the Rules of Debit and Credit What You’ll Learn  How to analyze a transaction affecting assets, liabilities, and owner’s equity. What.

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Presentation on theme: "Section 2Applying the Rules of Debit and Credit What You’ll Learn  How to analyze a transaction affecting assets, liabilities, and owner’s equity. What."— Presentation transcript:

1 Section 2Applying the Rules of Debit and Credit What You’ll Learn  How to analyze a transaction affecting assets, liabilities, and owner’s equity. What You’ll Learn  How to analyze a transaction affecting assets, liabilities, and owner’s equity. Why It’s Important You need to analyze transactions properly so that you record them correctly. Why It’s Important You need to analyze transactions properly so that you record them correctly.

2 Business Transaction Analysis: Steps to Success Business Transaction ANALYSIS Identify1.Identify the accounts affected. Classify2.Classify the accounts affected. + / -3.Determine the amount of increase or decrease for each account affected. Section 2Applying the Rules of Debit and Credit (cont'd.)

3 Business Transaction Analysis: Steps to Success (cont'd.) Business Transaction DEBIT-CREDIT RULE 4.Which account is debited? For what amount? 5.Which account is credited? For what amount? Section 2Applying the Rules of Debit and Credit (cont'd.)

4 Business Transaction Analysis: Steps to Success (cont'd.) Business Transaction T ACCOUNTS 6.What is the complete entry in T-account form? Section 2Applying the Rules of Debit and Credit (cont'd.) Account Name

5 Business Transaction Analysis Business Transaction 1 ANALYSIS Identify1.The accounts Cash in Bank and Maria Sanchez, Capital are affected. Classify2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s capital account. + / -3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.

6 Business Transaction Analysis (cont'd.) Business Transaction 1 (cont'd.) DEBIT-CREDIT RULE 4.Increases in asset accounts are recorded as debits. Debit Cash in Bank for $25,000. 5.Increases in the owner’s capital account are recorded as credits. Credit Maria Sanchez, Capital for $25,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.

7 Business Transaction Analysis (cont'd.) Business Transaction 1 (cont'd.) T ACCOUNTS 6. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 1, Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. Maria Sanchez, Cash in Bank Capital Debit + 25,000 Credit + 25,000

8 Business Transaction Analysis (cont'd.) Business Transaction 3 ANALYSIS Identify1.The accounts Computer Equipment and Cash in Bank are affected. Classify2.Computer Equipment and Cash in Bank are asset accounts. + / –3.Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

9 Business Transaction Analysis (cont'd.) Business Transaction 3 (cont'd.) DEBIT-CREDIT RULE 4.Increases in asset accounts are recorded as debits. Debit Computer Equipment for $3,000. 5.Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $3,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

10 Business Transaction Analysis (cont'd.) Business Transaction 3 (cont'd.) T ACCOUNTS 6. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system. Computer EquipmentCash in Bank Debit + 3,000 Credit – 3,000

11 Business Transaction Analysis (cont'd.) Business Transaction 4 ANALYSIS Identify1.The accounts Delivery Equipment and Accounts Payable—North Shore Auto are affected. Classify2.Delivery Equipment is an asset account. Accounts Payable—North Shore Auto is a liability account. + / –3.Delivery Equipment is increased by $12,000. Accounts Payable— North Shore Auto is increased by $12,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

12 Business Transaction Analysis (cont'd.) Business Transaction 4 (cont'd.) DEBIT-CREDIT RULE 4.Increases in asset accounts are recorded as debits. Debit Delivery Equipment for $12,000. 5.Increases in liability accounts are recorded as credits. Credit Accounts Payable—North Shore Auto for $12,000. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

13 Business Transaction Analysis (cont'd.) Business Transaction 4 (cont'd.) T ACCOUNTS 6. Section 2Applying the Rules of Debit and Credit (cont'd.) On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000. DeliveryAccounts Payable— EquipmentNorth Shore Auto Debit + 12,000 Credit + 12,000

14 Check Your Understanding In double-entry accounting, for each transaction there must be at least two entries. If you are increasing the Cash in Bank account, what other accounts might be affected? Section 2Applying the Rules of Debit and Credit (cont'd.)


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