chapter02 Debts and Credit Analyzing and Recurring Business transaction

1. 2 - 1
Debits and Credits –
Analyzing and Recording
Business Transactions
Chapter 2

2. 2 - 2
Setting up and organizing
a chart of accounts.
Learning Objective 1

3. 2 - 3
Business Transactions
1 Owner invests cash in a business.
2 Owner buys business assets.
3 Services are performed and cash received.
4 Services are performed and billed to
customers as accounts receivable.
5 Business expenses are incurred and paid for
with cash or paid for later.

4. 2 - 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. 2 - 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. 2 - 6
Left Right
Debit Credit
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

7. 2 - 7
Learning Unit 2-1
The Ledger Account
Balance
Account: Cash Account: 1000
Date ref. debit credit debit credit
June 1 5,000 5,000

8. 2 - 8
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.

9. 2 - 9
Account Name (Title)
Left side/Dr. (debit)
Right side/Cr. (credit)
Account Name (Title)
Debits and Credits

10. 2 - 10
Balancing an Account
 T accounts:
1 Add each side (debit & credit side).
2 Foot the account by writing the numbers in
small type at the bottom of each side.
3 Calculate the ending balance by subtracting
the smaller side from the larger side.
 Ledger accounts:
 Some types contain a running balance.

11. 2 - 11
Recording transactions in
T accounts according to
the rules of debit and credit.
Learning Objective 2

12. 2 - 12
Learning Unit 2-2
 Recording Business Transactions: Debits
and Credits
 T accounts will be used.
 Remember the accounting equation:
Assets = Liabilities + Owner’s Equity

13. 2 - 13
*Dr. (Debit)
assets
expenses
withdrawals
Account
Categories
Rules of Debit & Credit
A normal balance of an account is the
increase side.*
Normal Balance

14. 2 - 14
Rules of Debit & Credit
A normal balance of an account is the
increase side.*
Normal Balance
liabilities
capital
revenue
*Cr. (Credit)
Account
Categories

15. 2 - 15
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.

16. 2 - 16
Balance Sheet
Assets
1000 Cash
1020 Accounts Receivable
1030 Office Supplies
1040 Computer Equipment
1050 Office Equipment
Chart of Accounts

17. 2 - 17
Balance Sheet
Liabilities
2000 Accounts Payable
Owner’s Equity
3010 Capital
3020 Withdrawals
Chart of Accounts

18. 2 - 18
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
Income Statement
Chart of Accounts

19. 2 - 19
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

20. 2 - 20
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

21. 2 - 21
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

22. 2 - 22
Enter Transactions Example
 During the month of July the following
transactions took place.
g Received a $155 telephone bill which will
be paid later.
h Paid $150 for insurance coverage.
i Paid $200 for the supplies previously
purchased.

23. 2 - 23
Enter Transactions Example
j Performed $850 of services on account.
k Paid another $85 for the supplies previously
purchased.

24. 2 - 24
Phone Expense
g) 155
Accounts Payable
300
g) 155
Enter Transactions Example
g Debit Phone Expense and credit Accounts
Payable which increases both accounts’
normal balances.

25. 2 - 25
Enter Transactions Example
h Debit Insurance Expense and credit Cash
which increases an expense and decreases
an asset.
Insurance Expense
h) 150
Cash
4,500
h) 150

26. 2 - 26
Enter Transactions Example
i Debit Accounts Payable and credit Cash
which decreases both accounts’ balances.
Cash
4,500 h) 150
i) 200
Accounts Payable
300
i) 200 g) 155

27. 2 - 27
Enter Transactions Example
j Debit Accounts Receivable and credit
Revenue which increases the normal
balance of both accounts.
Accounts Receivable
j) 850
Service Revenue
1,600
j) 850

28. 2 - 28
Enter Transactions Example
k 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

29. 2 - 29
Preparing a trial balance.
Learning Objective 3

30. 2 - 30
Assets
1000 Cash $4,065
1020 Accounts Receivable 850
1030 Office Supplies 300
1040 Computer Equipment 1,200
1050 Office Equipment
Total $6,415
Learning Unit 2-3
Clara J. Accounting Practice
Trial Balance

31. 2 - 31
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

32. 2 - 32
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

33. 2 - 33
Learning Objective 4
Preparing financial reports
from a trial balance.

34. 2 - 34
Clara J. Accounting Practice
Income Statement
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

35. 2 - 35
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

36. 2 - 36
Clara J. Accounting Practice
Balance Sheet
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

37. 2 - 37
End of Chapter 2