Transactions That Affect Assets Liabilities and Owners Equity
Transactions That Affect Assets, Liabilities, and Owner’s Equity 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?
What You Will Learn • How to use T accounts • Why you need a ledger • The rules of debit and credit
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) Why It’s Important The rules of debit and credit are the basis for entering transactions into the records of a business. Key Terms = = = = ledger chart of accounts double-entry accounting T account debit credit normal balance
Ledger • Accounts are grouped together in a ledger – Manual or electronic system • Known as “keeping the books” • Grouping accounts makes info easy to find • Info taken from ledger is organized into reports to provide financial statements
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) The Chart of Accounts A list of all the accounts and their assigned account numbers. Roadrunner Delivery Service 155 Gateway Blvd. Sacramento, CA 94230 CHART OF ACCOUNTS ASSETS LIABILITIES OWNER’S EQUITY REVENUE EXPENSES 101 105 110 115 120 125 201 205 301 302 303 401 505 510 515 Cash in Bank Accounts Receivable--City News Accounts Receivable--Green Company Computer Equipment Office Equipment Delivery Equipment Accounts Payable--Beacon Advertising Accounts Payable--North Shore Auto Maria Sanchez, Capital Maria Sanchez, Withdrawals Income Summary Delivery Revenue Advertising Expense Maintenance Expense Rent Expense Utilities Expense
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) 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. ) T Accounts The T account, so called because of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction. Account Name Left Side Debit Right Side Credit
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) 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.
Remembering Accounting Rules (alore)
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) Rules for Asset Accounts Assets Debit + (1) Increase Side (3) Normal Balance Credit – (2) Decrease Side
RULES FOR ASSET ACCOUNTS • An ASSET account is INCREASED (+) ON the DEBIT side (left side) • An ASSET account is DECREASED (-) on the CREDIT side (right side) • The NORMAL BALANCE for an ASSET account is the INCREASE SIDE (debit side) • ASSETS normally have DEBIT balances
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) Cash in Bank Debit + 200 150 350 Balance 240 Credit – 70 40 110
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) Rules for Liability and Owner’s Capital Accounts Liabilities Debit Credit – + (1) Increase Side (1) (3) Increase Normal Side Balance (2) Decrease Side Owner’s Equity Debit Credit – ++ (2) Decrease (1)Increase Side (3)Normal Balance
Rules for Liability and Owner’s Capital Accounts • INCREASED on the CREDIT side (right side) • DECREASED on the DEBIT side (left side) • The NORMAL BALANCE is on the INCREASE side, or the CREDIT side • Normally have CREDIT balances (right side)
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) Example: Accounts Payable Debit – 100 75 175 Credit ++ 200 175 375 Bal. 200 M. Sanchez, Capital Debit – 350 200 550 Credit ++ 1, 500 2, 500 (3) Normal 4, 000 Balance Bal. 3, 450
Look at top of page 76 in your textbook
Section 1 Accounts and the Double-Entry Accounting System (cont'd. ) Check Your Understanding Explain why the normal balance of an asset account is on the debit side of the account.
- Slides: 17