Chapter Two

1
Chapter Two

• T Accounts, Debits and Credits, Trial Balance,
  and Financial Statements

2
Performance Objectives

• Determine balances of T accounts having entries
  recorded on both sides of the accounts
• Present the fundamental accounting equation with
  the T account form, and label the debit and
  credit sides
• Record directly in T accounts a group of business
  transactions involving changes in asset,
  liability, owners equity, revenue, and expense
  accounts for a service business

3
Performance Objectives

• Prepare a trial balance
• Prepare
• Income statement
• Statement of owners equity
• Balance sheet
• Recognize the effect of transpositions and slides
  on account balances

4
T Account Form

• Shaped like the letter T
• One side for increases () to the account
• The other side for decreases (-) to the account
• Normal Balance
• The increase (plus) side of any T account.

34,120
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Compare Account Column to T Account
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Debit Credit

• What does Debit mean?
• Forget what you know about debit cards!

• What does Credit mean?
• Forget what you know about credit cards!

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In Accounting

• Debit Left
• Debit DR Left

• Credit Right
• Credit CR Right

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T Accounts

• Assets
• The plus side for assets is placed on the left,
  and the minus side is placed on the right

9
T Accounts

• Liabilities and owners equity
• Since these classifications are placed on the
  opposite side of the equals sign, the plus and
  minus signs are also placed on the opposite sides
  (switched around)

10
In Accounting

• Debit is Left
• Credit is Right
• DR is Left
• CR is Right
• For every account this is true!

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T Accounts

• Recall that we placed revenue and expenses under
  the umbrella of owners equity
• Revenue increases owners equity
• Expenses decrease owners equity

• Remember
• Drawing is placed under the umbrella of the
  Capital account

12
Present The Fundamental Accounting Equation With
The T Account Form, And Label The Debit And
Credit Sides As Well As The Plus And Minus Sides

• We switch the plus and minus signs around on the
  other side of the equals sign so that we will be
  able to carry out double-entry accounting
• Whenever there is a minus in front of the
  account, we must switch the plus minus around

13
Debits Must Always Equal CreditsDR CR

• The critical rule to remember is that the amount
  placed on the debit side of one or more accounts
  MUST equal that amount placed on the credit side
  of another account or accounts.

14
Record Directly In T Accounts A Group Of Business
Transactions Involving Changes In Asset,
Liability, Owners Equity, Revenue, And Expense
Accounts For A Service Business

• Step 1
• Which accounts are involved?
• Step 2
• How should you classify the accounts?
• Asset
• Liability
• Capital
• Revenue
• Expenses

• Step 3
• Are the accounts increased or decreased?
• Step 4
• Which accounts are debited and which accounts are
  credited?
• Step 5
• Balance the equations
• DR CR
• A L OE

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Recording Business Transactions for a Service
Business
We will be recording business transactions for a
company with the following details
Owner name
L. P. Arch
Business name
Arch Copy Co.
Business type
Sole proprietorship
(one-person business)
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Transaction (a) Arch deposited 70,000 in a bank
account in name of business.
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Transaction (b) Bought equipment, paying cash,
33,000.
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Transaction (c) Bought equipment on account from
Melton Office Supply, 7,000.
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Transaction (d) Paid Melton Office Supply, a
creditor, 2,000.
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Transaction (e) Arch invested her personal
computer equipment having a fair market value of
6,200 in Arch Copy Co.
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Transaction (f) Arch Copy Co. sold services for
cash, 2,520.
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Transaction (g) Paid rent for the month, 700.
23
Transaction (h) Bought supplies (toner and
paper) on credit. These supplies are used
immediately therefore, they are recorded as an
expense (600).
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Transaction (i) Arch Copy Co. paid 360 for a
one-year liability insurance policy.
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Transaction (j) Received bill for newspaper
advertising, 200.
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Transaction (k) Arch Copy Co. completed a
printing job and billed Walker Company 1,050 for
services performed.
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Transaction (l) Arch Copy Co. paid 1,800 to
Melton Office Supply, its creditor, as part
payment on account.
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Transaction (m) Arch Copy Co. received and paid
electric bill, 160.
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Transaction (n) Arch Copy Co. paid on account
200 to City News for advertising.
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Transaction (o) Arch Copy Co. paid wages of a
part-time employee, 2,130.
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Transaction (p) Bought additional equipment from
Melton Office Supply, 3,520, paying 620 down
with the remaining 2,900 on account.
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Transaction (q) Arch Copy Co. received 850 cash
on account from a credit customer.
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Transaction (r) Arch Copy Co. received revenue
from cash customers for the rest of the month,
4,220.
34
Transaction (s) Arch withdrew 2,500 in cash
from the business for her personal use.
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Footing
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Balances
37
Performance Objective 5

• Prepare a trial balance

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Prepare a Trial Balance

• List the account balances in two columns
• Left column Debits
• Right column Credits
• List the accounts in the same order as the chart
  of accounts
• First the balance sheet accounts
• Then the income statement accounts

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Trial Balance

• A trial run to prove that DR CR
• If DR CR, then A L OE

40
Trial Balance

• Not a financial statement
• Dont use dollar signs
• Use a single underline under the list of figures
  to be added
• Use a double underline under column totals

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Accounting

• Process of
• Analyzing
• Classifying
• Recording
• Summarizing
• Interpreting business transactions

Summarizing means preparing financial statements
42
Performance Objective 6

• Prepare
• Income statement
• Statement of owners equity
• Balance sheet

43
All Financial Statements

• Summarize useful financial information for users
  of accounting information
• Owners/investors
• Managers
• Creditors
• Government agencies

44
All Financial Statements

• Have a three-line title
• Who Name of the company (or owner)
• What Title of financial statement
• When Period of time or a single date

Income Statement Or Statement of OE
Balance Sheet
45
Income Statement

• Total Revenue Total Expenses Net Income (or
  Net Loss)

46
Income Statement

• Answers the questions
• How profitable was the company over the past
  period?
• How much net income did the entity earn?

Revenues ExpensesNet Income
47
What the Income Statement Tells Us

• Is the business profitable?
• What is the net income?
• Revenue gt Expenses
• What is the net loss?
• Expenses gt Revenue

48
Income Statement

• Income StatementAlso Known As
• Statement of income and expenses
• Profit and loss statement
• Results of operations
• Net IncomeAlso Known As
• Profit
• Earnings

49
Net Income

• Use the net income figure on the income statement
  to complete the statement of owners equity

50
Statement of Owners Equity

• Prepared after you finish the income statement
• Answers the questions
• How did the owners equity change over the last
  period?
• How and why did the Capital account change?
• Provides ending Capital amount for use on the
  balance sheet

00
51
Additional Investment in the Company

• Can you invest assets other than cash?
• Tools?
• Trucks?
• Equipment?
• Yes!
• They must be recorded at their fair market value
  (what they would be sold for on the open market)

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Balance Sheet
53
Balance Sheet

• Answers the questions
• What is the entitys financial position on the
  last day of the period?
• What assets, liabilities, and equities does the
  entity have on the last day of the period?
• Uses the ending capital figure shown on the
  statement of owners equity
• Resembles a snapshotshows a point in time
• Be careful of the date!

54
Balance Sheet

• List accounts in the same order as the chart of
  accounts
• Why?
• Listed in order of liquidity
• Liquidity How quickly it can be turned into cash
• Report Form
• Balance Sheet presentation where Assets are above
  Liabilities and Owners Equity

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Errors Exposed by the Trial Balance

• DR ? CR?
• Arithmetic error
• Trial balance columns added correctly?
• Accounts added correctly?
• Half an entry
• DR without a CR?
• Example If Trial Balance is off by 100, did you
  record the DR without the CR?

• DR ? CR?
• Both sides of an entry on one side (two DRs)
• Example If the Trial Balance is off by 200,
  divide by 2 to get 100 and look for transactions
  for the amount 100 (100 DR to Cash and 100 DR
  to Revenue)
• Recording amounts incorrectly
• Look back to original receipt, source document,
  or problem

56
Errors Exposed by the Trial Balance

• When DR CR, there can still be an error if you
• Forgot to record a transaction
• Recorded the transaction twice
• Recorded the transaction for an incorrect amount
• Recorded the amount in the incorrect account

57
How Do You Find the Errors?

• Pay careful attention as you record transactions.
• Look to see if a normal balance was placed in the
  wrong column.
• Re-add the columns.
• Check to see if account totals were transferred
  correctly.
• Recalculate the footings and balances in the
  accounts.

58
Performance Objective 7

• Recognize the effect of transpositions and slides
  on account balances

59
Transpositions and Slides

• Transposition error
• Digits have been transposed (switched around)
• Slide error
• The decimal point in an amount has been misplaced
• Slide the decimal place

60
Transpositions and Slides

• Finding an error
• Divide the difference between two trial balance
  totals by 2, or multiply by 2. See if the result
  matches a transaction amount.
• Errors divisible by 9 If an error exists and the
  amount of difference between the totals of the
  trial balance is evenly divisible by 9, the error
  consists of either a transposition or a slide or
  both.

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Demonstration Problem

• We will be recording business transactions for a
  company with the following details

62
Transaction (a) Nelson deposited 43,000 in a
bank account in the name of business.
63
Transaction (b) Bought truck, paying cash,
23,000.
64
Transaction (c) Bought camper shell for truck on
account from Louie's Trucks Campers, 2,500.
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Expenses
Assets
Liabilities
Owner's Equity
Revenue










Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Cash
Accounts Payable
R. P. Nelson, Capital
Income from Demos
Wages Expense










Debit
Credit
Debit
Credit
Debit
Debit
Credit
Credit
Debit
Credit
a)
43,000
b)
23,000
d)
1,500
c)
2,500
a)
43,000
f)
2,500.0
f)
2,500
d)
1,500
h)
600
e)
3,400
Rent Expense
g)
700


R. P. Nelson, Drawing
Debit
Credit
g)
700
-

Debit
Credit
Supplies Expense


Debit
Credit
h)
600
Advertising Expense
Accounts Receivable




Debit
Credit
Debit
Credit
Traveling Expense


Prepaid Insurance
Debit
Credit


Debit
Credit
Equipment


Debit
Credit
b)
23,000
c)
2,500
e)
3,400
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Revenue
Expenses
Assets
Liabilities
Owner's Equity










Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Wages Expense
Income from Demos
Accounts Payable
R. P. Nelson, Capital
Cash










Debit
Credit
Debit
Credit
Credit
Debit
Credit
Debit
Debit
Credit
a)
43,000
b)
23,000
d)
1,500
c)
2,500
a)
43,000
f)
2,500
f)
2,500
d)
1,500
h)
600
e)
3,400
Rent Expense
g)
700


i)
2,000
Debit
Credit
R. P. Nelson, Drawing
g)
700

-
Debit
Credit
Supplies Expense


Debit
Credit
h)
600
Advertising Expense
Accounts Receivable


Debit
Credit


Debit
Credit
Traveling Expense


Prepaid Insurance
Debit
Credit


Debit
Credit
i)
2,000
Equipment


Debit
Credit
b)
23,000
c)
2,500
e)
3,400
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Expenses
Assets
Liabilities
Owner's Equity
Revenue










Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Cash
Accounts Payable
R. P. Nelson, Capital
Income from Demos
Wages Expense










Debit
Credit
Debit
Credit
Debit
Debit
Credit
Credit
Debit
Credit
a)
43,000
b)
23,000
d)
1,500
c)
2,500
a)
43,000
f)
2,500
f)
2,500
d)
1,500
h)
600
e)
3,400
Rent Expense
g)
700
j)
200


i)
2,000
R. P. Nelson, Drawing
Debit
Credit
-

g)
700
Debit
Credit
Supplies Expense


Debit
Credit
h)
600
Advertising Expense
Accounts Receivable




Debit
Credit
Debit
Credit
j)
200
Traveling Expense


Prepaid Insurance
Debit
Credit


Credit
Debit
i)
2,000
Equipment


Debit
Credit
b)
23,000
c)
2,500
e)
3,400
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Footing
82
Balances
83
Trial Balance
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Income Statement
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Statement of Owners Equity
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Balance Sheet