CHAPTER 3: Analyzing Transactions into Debit and Credit Parts

1
CHAPTER 3 Analyzing Transactions into Debit and
Credit Parts

• OBJECTIVES
• Define accounting terms related to analyzing
  transactions into debit and credit parts.
• Identify accounting practices related to
  analyzing transactions into debit and credit
  parts.
• Use T accounts to analyze transactions showing
  which accounts are debited or credited for each
  transaction.
• Analyze how transactions to set up a business
  affect accounts.
• Analyze how transactions affect owners equity
  accounts.

2
Ch 3-1 Using T-Accounts
ACCOUNT Used to summarize one item in the
accounting equation REVIEW

• Accounts Payable
• Owners Capital
• Revenue
• Withdrawals
• Expenses
• Rent
• Advertising
• Charity
• Phone/Cable/Internet
• Utilities

• Cash
• Supplies
• Prepaid Insurance
• Accounts Receivable

3
Transactions

• Transactions change the accounting equation, and
  transactions are summarized in accounts.
• Effects of transactions can be recorded in an
  accounting equation, BUT this is not practical in
  an actual accounting system
• Too many accounts in most businesses
• Most keep a separate record for each account
• Can be represented as a T-account

4
ACCOUNTS
Left side value of all things owned?
assets Right side values of equities or claims
against the assets (liabilities and OE)
DEBIT (DR) CREDIT (CR)
Lesson 3-1, page 42
5
Account balances

• Normal Balance the side of the account that is
  increased when a transaction is made.
• Assets Normal DR Balance
• Liabilities Normal CR Balance
• Owners Capital Normal CR Balance

6
Increases and Decreases in Accounts

• Two basic accounting rules regulate increases and
  decreases of account balances
• Account balances INCREASE on the normal balance
  side
• Account balances DECREASE on the opposite side of
  the normal balance

7
INCREASES AND DECREASES IN ACCOUNTS
CREATE CHART!
Lesson 3-1, page 43
8
INCREASES AND DECREASES IN ACCOUNTS

• ALL Asset accounts? NORMAL DEBIT BALANCE
• increase on the debit side and decrease on the
  credit side
• ALL Liability accounts? NORMAL CREDIT BALANCE
• increase on credit side and decrease on the debit
  side
• Owners Capital account? NORMAL CREDIT BALANCE
• increase on credit side and decrease on the debit
  side
• NOT TRUE for ALL Owners EQUITY
  accounts

9
TERMS REVIEW

• TO DO
• Audit, pg. 44
• Work Together
• On your own

T account debit credit normal balance
Lesson 3-1, page 44
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Ch 3-2 Analyzing How Transactions Affect Accounts

• Chart of accounts List of accounts used by a
  business pg. 3
• REMEMBER---
• Received cash always means that cash is
  received and will be DEBITED
• Paid cash always means that cash decreases and
  will be CREDITED

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Received Cash from Owner as Investment

• Four Questions to ask Before Recording a
  Transaction
• What accounts are affected?
• How is each account classified?
• Asset, Liability, Owners Equity, Expense,
  Revenue
• How is the account balance changed? -
• How is each amount entered into the T-account?
  Debit - Credit

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RECEIVED CASH FROM OWNER AS AN INVESTMENT
August 1. Received cash from owner as an
investment, 10,000.00.
2
2
1
1
4
4
3
3
1. Cash and Barbara Treviño, Capital are affected.
2. Cash is an asset account. Barbara Treviño,
Capital is an owners equity account.
3. Assets are increased. Owners Equity is
increased.
4. Cash is debited. Barbara Treviño, Capital is
credited.
Lesson 3-2, page 45
13

• DO NOT ASSUME THAT BOTH SIDES OF ACCOUTING
  EQUATION WILL ALWAYS BE AFFECTED!!!
• DEBITS CREDITS
• Assets Liabilities Owners Equity

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PAID CASH FOR SUPPLIES
August 3. Paid cash for supplies, 1,577.00.
2
1
1
4
4
3
3
1. Supplies and Cash are affected.
2. Supplies and Cash are assets.
3. Assets (Supplies) are increased. Assets (Cash)
are decreased.
4. Supplies is debited. Cash is credited.
Lesson 3-2, page 46
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PAID CASH FOR INSURANCE
August 4. Paid cash for insurance, 1,200.00.
2
1
1
4
4
3
3
1. Prepaid Insurance and Cash are affected.
2. Prepaid Insurance and Cash are assets.
3. Assets (Prepaid Insurance) are increased.
Assets (Cash) are decreased.
4. Prepaid Insurance is debited. Cash is credited.
Lesson 3-2, page 47
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BOUGHT SUPPLIES ON ACCOUNT
August 7. Bought supplies on account from Ling
Music Supplies, 2,720.00.
2
2
1
1
4
4
3
3
1. Supplies and Accounts PayableLing Music
Supplies are affected.
2. Supplies is an asset. Accounts PayableLing
Music Supplies is a liability.
3. Assets are increased. Liabilities are
increased.
4. Supplies is debited. Accounts PayableLing
Music Supplies is credited.
Lesson 3-2, page 48
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PAID CASH ON ACCOUNT
August 11. Paid cash on account to Ling Music
Supplies, 1,360.00.
PAGE 49
1. Accounts PayableLing Music Supplies and Cash
are affected.
2. Cash is an asset. Accounts PayableLing Music
Supplies is a liability.
3. Assets are decreased. Liabilities are
decreased.
4. Accounts PayableLing Music Supplies is
debited. Cash is credited.
Lesson 3-2, page 49
18

• REMEMBER when you decrease an account balance,
  record the decrease side on the side opposite the
  normal balance of the account.

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TERMS REVIEW

• Assign
• App 3-1, 3-2

• chart of accounts
• TO DO
• Audit, pg 50
• Work Together
• On your own

Lesson 3-2, page 50
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INCREASES AND DECREASES IN ACCOUNTS

• ALL Asset accounts? NORMAL DEBIT BALANCE
• increase on the debit side and decrease on the
  credit side
• ALL Liability accounts? NORMAL CREDIT BALANCE
• increase on credit side and decrease on the debit
  side
• Owners Capital account? NORMAL CREDIT BALANCE
• increase on credit side and decrease on the debit
  side

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INCREASES AND DECREASES IN ACCOUNTS
Lesson 3-1, page 43
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Ch. 3-3 Analyzing How Transactions Affect
Owners Equity Accounts

• August 12. Received cash from sales, 325.00
• Revenue increases OE!!!!
• Can be recorded in owners capital account
• BUT to avoid a capital account with VERY large
  entries? use separate REVENUE account, SALES
• Revenue increases OE? normal credit balance

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RECEIVED CASH FROM SALES
August 12. Received cash from sales, 325.00.
2
2
1
1
4
4
3
3
1. Cash and Sales are affected.
2. Cash is an asset. Sales is a revenue account
that affects owners equity.
3. Assets are increased. Owners equity is
increased.
4. Cash is debited. Sales is credited.
Lesson 3-3, page 51
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• August 12. Sold services on account to Kids Time,
  200.00
• Analysis for selling services on account is
  similar to that for selling services for cash,
  BUT cash is NOT received at the time of sale
• Cash account is NOT affected when sales are made
  ON ACCOUNT
• Transaction increases the ACCOUNTS RECEIVABLE
  account (asset) and SALES account (owners equity)

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SOLD SERVICES ON ACCOUNT
August 12. Sold services on account to Kids Time,
200.00.
2
2
1
1
4
4
3
3
1. Accounts ReceivableKids Time and Sales are
affected.
2. Accounts ReceivableKids Time is an asset.
Sales is a revenue account that affects owners
equity.
3. Assets are increased. Owners equity is
increased.
4. Accounts ReceivableKids Time is debited.
Sales is credited.
Lesson 3-3, page 52
26

• August 12. Paid cash for rent, 250.00
• Expenses DECREASE Owners Equity!!!!
• could be recorded as decrease in capital, BUT to
  avoid too many entries in capital? recorded
  separately
• Rent expense? records all payments for rent
• OE, capital? Normal credit balance
• decreases in OE? shown as DEBIT
• ALL EXPENSES have a normal DEBIT balance

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PAID CASH FOR AN EXPENSE
August 12. Paid cash for rent, 250.00.
2
2
1
4
3
1
1. Rent Expense and Cash are affected.
4
2. Cash is an asset. Rent Expense is an expense
account that affects owners equity.
3
3
3. Assets are decreased. Owners equity is
decreased expenses are increased.
Lesson 3-3, page 53
4. Rent Expense is debited. Cash is credited.
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• August 12. Received cash on account from Kids
  Time, 100.00
• This transaction does NOT affect Owners Equity
• Revenue was recorded at time of sale cannot be
  recorded twice
• Realization of Revenue

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RECEIVED CASH ON ACCOUNT
August 12. Received cash on account from Kids
Time, 100.00.
2
1
1
4
4
3
3
1. Cash and Accounts ReceivableKids Time are
affected.
2. Cash and Accounts ReceivableKids Time are
assets.
3. Assets (Cash) are increased. Assets (Accounts
ReceivableKids Time) is decreased.
4. Cash is debited. Accounts ReceivableKids Time
is credited.
Lesson 3-3, page 54
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August 12. Paid cash to owner for personal use,
100.00

• This transaction is NOT an expense
• Withdrawals decrease Owners Equity
• Could be recorded directly into OE, but instead
  use separate account
• Drawing? withdrawal account
• SEE PAGE 55

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August 12. Paid cash to owner for personal use,
100.00

• What accounts are affected?
• Drawing and Cash
• How is each account classified?
• Drawing? OE account
• Cash? asset account
• How is the account balance changed? -
• OE is decreased by an increased in withdrawal
• Assets are decreased
• How is each amount entered into the account?
  Debit Credit
• OE decreases on debit side? increase in
  withdrawals decreases OE
• withdrawal accounts have a normal debit balance
• OE account is debited
• Assets decrease on the credit side? cash is
  credited

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TO DO

• Audit, pg 56
• Work Together, 56
• On your own, 56
• App 3-3, 3-4
• CHAPTER 3 REVIEW
• Ch. 3 Quiz
• Mastery 3-5
• Case 1 and 2 pg 62
• Ch. 3 Study Guide