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Transactions That Affect Assets, Liabilities, and Owner’s Equity
Transactions That Affect Assets, Liabilities, and Owner’s EquityMaking Accounting Relevant
Accounting and finance professionals
are key to every business operation.
Making Accounting Relevant
Accounting and finance professionals
are key to every business operation.
How might the work performed by the accountant affect the day-to-day decisions made by the business owner?
How might the work performed by the accountant affect the day-to-day decisions made by the business owner?
Section 1Accounts and the Double-Entry Accounting System
Section 1Accounts and the Double-Entry Accounting System
What You’ll Learn
How to use T accounts.
Why you need a ledger.
The rules of debit and credit.
What You’ll Learn
How to use T accounts.
Why you need a ledger.
The rules of debit and credit.
Why It’s ImportantThe rules of debit and credit are the
basis for entering transactions into the records of a business.
Why It’s ImportantThe rules of debit and credit are the
basis for entering transactions into the records of a business.
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Key Terms ledger chart of accounts double-entry accounting T account debit credit normal balance
Key Terms ledger chart of accounts double-entry accounting T account debit credit normal balance
The Chart of AccountsA list of all the accounts and their
assigned account numbers.
The Chart of AccountsA list of all the accounts and their
assigned account numbers.
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Roadrunner Delivery Service155 Gateway Blvd.
Sacramento, CA 94230
CHART OF ACCOUNTS
ASSETS 101 Cash in Bank105 Accounts Receivable--City News110 Accounts Receivable--Green Company115 Computer Equipment120 Office Equipment125 Delivery Equipment
LIABILITIES 201 Accounts Payable--Beacon Advertising205 Accounts Payable--North Shore Auto
OWNER’S EQUITY 301 Maria Sanchez, Capital302 Maria Sanchez, Withdrawals303 Income Summary
REVENUE 401 Delivery Revenue
EXPENSES 501 Advertising Expense505 Maintenance Expense510 Rent Expense515 Utilities Expense
Roadrunner Delivery Service155 Gateway Blvd.
Sacramento, CA 94230
CHART OF ACCOUNTS
ASSETS 101 Cash in Bank105 Accounts Receivable--City News110 Accounts Receivable--Green Company115 Computer Equipment120 Office Equipment125 Delivery Equipment
LIABILITIES 201 Accounts Payable--Beacon Advertising205 Accounts Payable--North Shore Auto
OWNER’S EQUITY 301 Maria Sanchez, Capital302 Maria Sanchez, Withdrawals303 Income Summary
REVENUE 401 Delivery Revenue
EXPENSES 501 Advertising Expense505 Maintenance Expense510 Rent Expense515 Utilities Expense
Double-Entry Accounting
Double-entry accounting is a
system of recordkeeping in which
each business transaction affects
at least two accounts.
Double-Entry Accounting
Double-entry accounting is a
system of recordkeeping in which
each business transaction affects
at least two accounts.
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
T AccountsThe T account, so called because
of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction.
T AccountsThe T account, so called because
of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction.
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Account Name
Left Side Right Side
Debit Side Credit Side
Debit Credit
Account Name
Left Side Right Side
Debit Side Credit Side
Debit Credit
The Rules of Debit and Credit
The rules of debit and credit vary
according to whether an account is
classified as an asset, a liability, or
an owner’s capital account.
Normal balance is always on the
side used to record increases to the
account. The word normal used
here means usual.
The Rules of Debit and Credit
The rules of debit and credit vary
according to whether an account is
classified as an asset, a liability, or
an owner’s capital account.
Normal balance is always on the
side used to record increases to the
account. The word normal used
here means usual.
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Rules for Asset AccountsRules for Asset Accounts
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Assets
Credit
–(2) Decrease Side
Debit
+
(1) Increase Side
(3) Normal Balance
Rules for Liability and Owner’s Capital AccountsRules for Liability and Owner’s Capital Accounts
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Liabilities
Debit Credit
– +
(1) Increase Side
(3) Normal Balance
Debit
–
(2) Decrease
Side
Owner’s Equity
Debit Credit
– +
(2) Decrease (1) Increase Side Side
(3) Normal Balance
Credit
+
(1) Increase
Side
(3) Normal
Balance
Check Your UnderstandingCheck Your Understanding
Explain why the normal
balance of an asset account is
on the debit side of the
account.
Explain why the normal
balance of an asset account is
on the debit side of the
account.
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 1 Accounts and the Double-Entry Accounting System (cont'd.)
Section 2 Applying the Rules of Debit and Credit
Section 2 Applying 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.
Business Transaction Analysis: Steps to SuccessBusiness Transaction Analysis: Steps to Success
Business Transaction
ANALYSIS Identify 1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
+ / - 3.Determine the amount of increase or decrease for each account affected.
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Business Transaction Analysis: Steps to Success (cont'd.)
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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Business Transaction Analysis: Steps to Success (cont'd.)
Business Transaction Analysis: Steps to Success (cont'd.)
Business Transaction
T ACCOUNTS 6. What is the complete entry in T-account form?
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Account Name Account Name
Business Transaction AnalysisBusiness Transaction AnalysisBusiness Transaction 1
ANALYSIS Identify 1. The accounts Cash in Bank and Maria Sanchez, Capital are affected.Classify 2. 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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying 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.
Business Transaction Analysis (cont'd.)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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying 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.
Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)
Business Transaction 1 (cont'd.)
T ACCOUNTS 6.
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying 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
Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)
Business Transaction 3
ANALYSIS Identify 1. The accounts Computer Equipment and Cash in Bank are affected.
Classify 2. 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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)
On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.
Business Transaction Analysis (cont'd.)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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)
On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.
Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)
Business Transaction 3 (cont'd.)
T ACCOUNTS 6.
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)
On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.
Computer Equipment Cash in Bank
Debit
+
3,000
Credit
–
3,000
Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)
Business Transaction 4
ANALYSIS Identify 1. The accounts Delivery Equipment and Accounts Payable—North Shore Auto are affected.
Classify 2. 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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying 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.
Business Transaction Analysis (cont'd.)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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying 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.
Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)
Business Transaction 4 (cont'd.)
T ACCOUNTS 6.
Section 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying 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.
Delivery Accounts Payable— Equipment North Shore Auto
Debit
+
12,000
Credit
+
12,000
Check Your UnderstandingCheck 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?
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 2 Applying the Rules of Debit and Credit (cont'd.)
Section 2 Applying the Rules of Debit and Credit (cont'd.)