Chapter 2-3 Analyzing How Transactions Affect Owner’s Equity Accounts

Chapter 2-3Chapter 2-3

Analyzing How Transactions Analyzing How Transactions

Affect Owner’s Equity AccountsAffect Owner’s Equity Accounts

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RECEIVED CASH FROM SALESRECEIVED CASH FROM SALESpage 38

August 12. Received cash from sales, $295.00.

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SOLD SERVICES ON ACCOUNTSOLD SERVICES ON ACCOUNTpage 39

August 12. Sold services on account to Oakdale School, $350.00.

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Analyzing Transactions 2-3Analyzing Transactions 2-3

• Received cash from sales, $400.00• Revenue makes Owner’s Equity increase.

Assets = Liabilities + Owner’s Equity

Cash SalesDebit Credit Debit CreditN. Bal Normal Bal.

400.00 400.00

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Analyzing TransactionsAnalyzing Transactions

• Sold services on account to Kids Time, $500.00

Assets = Liabilities + Owner’s Equity

A.R. Kids Time SalesDebit Credit Debit CreditN. Bal Normal Bal.

500.00 500.00

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Analyzing Transactions --Use the four Analyzing Transactions --Use the four questions.questions.

• Received cash on account from Kids Time, $100.00

Assets = L + OE

Cash A.R. Kids TimeDebit Credit Debit CreditN. Bal N. Bal

$100.00 $100.00

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Analyzing Expense TransactionsAnalyzing Expense Transactions

• Expenses decrease owner’s equity.• The decreases from expenses could be recorded directly

in the Owner’s Equity account.• But, the OE account would have too many entries.• Using separate accounts for each helps to keep

information straight.

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Analyzing Expense TransactionsAnalyzing Expense Transactions

• The owner’s capital account has a normal credit balance.• Decreases in the owner’s capital account are shown as

debits.

• Therefore, an expense account has a normal debitdebit balance.

• Expenses are always debited.

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PAID CASH FOR AN EXPENSEPAID CASH FOR AN EXPENSEpage 40

August 12. Paid cash for rent, $300.00.

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Analyzing TransactionsAnalyzing Transactions

• Paid cash for rent, $800.00.• Expenses decrease Owner’s Equity--so an expense account’s

normal balance side is the left side.

Assets = Liabilities + Owner’s Equity Cash Rent ExpenseDebit Credit Debit CreditN. Bal Normal Bal. 800.00 800.00

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Owner’s Taxable IncomeOwner’s Taxable Income

A business owned by one person is called a proprietorship.• The IRS does not require the proprietorship, itself, to pay

taxes.• However, the owner must include the net income of the

proprietorship in his or her own taxable income.

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Owner WithdrawalsOwner Withdrawals

• Employee salaries are considered an expense that reduces the net income of a company.

• Owner withdrawals are not considered an expense.• Withdrawals do not affect the business’s income.

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PAID CASH TO OWNER PAID CASH TO OWNER FOR PERSONAL USEFOR PERSONAL USE

page 42

August 12. Paid cash to owner for personal use, $125.00.

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Analyzing TransactionsAnalyzing Transactions

• Paid cash to owner for personal use, 600.00.• Withdrawals decrease Owner’s Equity--so a drawing account’s normal balance is

the left side.

Assets = Liab. + Owner’s Equity

Cash Taylor Stalter, DrawingDebit Credit Debit Credit

N. Bal Normal Bal. 600.00 600.00

• Withdrawals could be recorded directly in the owner’s capital account. Using a separate Drawing account helps keep information separate.

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Audit Your UnderstandingAudit Your Understanding

What two accounts are affected when a business receives cash from sales?

• Cash and Sales

What two accounts are affected when services are sold on account.

• Sales and Accounts Receivable

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Audit Your UnderstandingAudit Your Understanding

What two accounts are affected when a business pays cash to the owner for personal use?

• Owner’s drawing account and Cash

Are revenue accounts increased on the debit side or credit side? Explain why.

• Credit side because sales increase owner’s equity

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Audit Your UnderstandingAudit Your Understanding

Are expense accounts increased on the debit side or credit side. Explain why.

• Debit side because expenses decrease owner’s equity.

Work Together, 3-3Work Together, 3-3

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