Accounting Chapter 3 Analyzing Transactions into Debit and
Accounting - Chapter 3 Analyzing Transactions into Debit and Credit Parts • Accounting equation was used to record daily business transactions. • Problem • too many accounts • too many transactions • A separate record is kept for each account
Accounts • T-account – an accounting device used to analyze transactions • The accounting equation can be representated as a “T” Assets Left side = Liabilities + Owner’s Equity Right Side • The accounting equation and a T-account must always remain in balance.
Accounts (continued). . . • Debit – an amount recorded on the left side of a T-account • Credit – an amount recorded on the right side of a T-account • The t-account will serve as a basic device for analyzing transactions • All accounts will have a NORMAL BALANCE Assets = Liabilities Left Side Debit Side Normal Balance + Owner’s Equity Right Side Credit Side Normal Balance
Accounts (Assets). . . Left Side Debit Side Normal Balance INCREASE ASSETS Right Side Credit Side DECREASE • When an asset account increases, DEBIT that asset account. • When an asset account decreases, CREDIT that asset We can use debits and credits account instead of pluses and minuses
Accounts (Liabilities). . . We can use debits and credits instead of pluses and minuses LIABILITIES Left Side Debit Side DECREASE Right Side Credit Side Normal Balance INCREASE • When a liability account increases, credit that liability account. • When a liability account decreases, debit that liability account.
Accounts (Owner’s Capital). . . We can use debits and credits instead of pluses and minuses Owner’s Capital Left Side Debit Side DECREASE Right Side Credit Side Normal Balance INCREASE • When a capital account increases, credit the capital account. • When a capital account decreases, debit the capital account.
Accounts (Sales). . . We can use debits and credits instead of pluses and minuses Sales Right Side Credit Side Normal Balance INCREASE • When the sales account increases, credit the sales account. • The Revenue Account (Sales) has a normal Credit balance because it increases Capital, which has a normal Credit balance.
Accounts (Expenses). . . We can use debits and credits instead of pluses and minuses Expenses Left Side Debit Side Normal Balance INCREASE • When an expense account increases, debit the individual expense account. Expense accounts increase when you pay cash for an expense. • The Expense accounts (Utilities Expense, Rent Expense, etc. ) have a normal Debit balance because they decrease Capital, which has a normal Credit balance.
Basic Rules Regulating the Increases and Decreases of Account Balances • Account balances increase on the normal side of an account • Account balances decrease on the side opposite the normal balance side of an account
Analyzing How Transactions Change Accounts • Each transaction affects at least two accounts. • Each account has its own t-account. • Each transaction must have at least one debit and at least one credit. • Debits must always equal credits. Four questions are asked when analyzing transactions into debit and credit parts. • What accounts are affected? - use the chart of accounts for reference • How is each account classified? is it an asset, liability, owner’s equity, revenue, or expense? • How is each account balance changed? Is the account balance increased or decreased? • How is each amount entered in the accounts? is the amount debited or credited?
Transaction #1 Received Cash from the Owner as an Investment • Received cash from owner as an investment, $10, 000. • What accounts are affected? Cash and Barbara Trevino, Capital • How is each account classified? Cash is an asset Barbara Trevino, Capital, is owner’s equity • How is each account balanced changed? cash increases Barbara Trevino, Capital increases • How is each amount entered? cash is debited Barbara Trevino, Capital is credited Assets = Liab + O. E. Normal Debit Balance Normal Credit Balance Increase by debiting Increase by crediting Decrease by debiting
Transaction #2 Paid Cash for Supplies • What accounts are affected? Cash and Supplies • How is each account classified? Don’t Forget. . . Debits must always equal credits!!! Both are assets • How is each balance changed? Cash decreases Supplies increase • How is each amount entered in the accounts? Cash is credited Supplies is debited Assets = Liab + O. E. Normal Debit Balance Normal Credit Balance Increase by debiting Increase by crediting Decrease by debiting
Transaction #3 Paid Cash for Insurance • What accounts are affected? Cash and Prepaid Insurance • How is each account classified? Both are assets • How is each account balance changed? Cash decreases Prepaid Insurance increases • How is each amount entered in the accounts? Cash is credited Prepaid Insurance is debited Assets = Liab + O. E. Normal Debit Balance Normal Credit Balance Increase by debiting Increase by crediting Decrease by debiting
Transaction #4 Bought Supplies on Account • Bought supplies on account from Butler Cleaning Supplies, $2, 720 • What accounts are affected? Supplies and Butler Cleaning supplies • How is each account classified? Supplies is an asset Butler Cleaning Supplis is a liability • How is each account balance changed? Supplies increases Butler Cleaning Supplies increases • How is each amount entered in the accounts? Supplies is debited Butler Cleaning Supplies is credited Don’t Forget. . . Debits must always equal credits!!!
Transaction #5 Paid Cash on Account • Paid cash on account to Butler Cleaning Supplies, $1, 360. • What accounts are affected? Cash and Butler Cleaning Supplies • How is each account classified? Cash is an asset Butler Cleaning Supplies is a liability • How is each account balance changed? Cash decreases Butler Cleaning Supplies decreases • How is each amount entered in the account? Cash is credited Butler Cleaning Supplies is debited
Transaction #6 Received Cash from Sales • Received cash from sales, $525. 00 • What accounts are affected? Cash and Sales • How is each amount classified? Cash is an asset Sales is a revenue account (has a normal credit balance) • How is each account balance changed? Cash is increased Sales is increased • How is each amount entered in the accounts? Cash is debited Sales is credited Don’t Forget. . . Debits must always equal credits!!!
Transaction #7 Paid Cash for an Expense • Paid cash for rent, $250. 00 • What accounts are affected? Cash and Rent Expense • How is each account classified? Cash is an asset Rent Expense is an expense with a normal debit balance • How is each account balance changed? Cash decreases Rent Expense increases • How is each amount entered in the accounts? Cash is credited Rent expense is debited
Transaction #8 Paid Cash to Owner for Personal Use • Contra Account – An account that reduces a related account on a financial statement – Drawing is a contra account - it reduces capital • Paid cash to owner for personal use, $100. 00 • What accounts are affected? Cash and Barbara Trevino, Drawing • How is each account classified? Cash is an asset Barbara Trevino, Drawing is a contra capital account with a normal debit balance. • How is each account balance changed? Cash decreases, Barbara Trevino, Drawing increases • How is each amount entered in the account? Cash is credited, Barbara Trevino, Drawing is debited
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