0 glencoe accounting unit 2 chapter 4 copyright © by the mcgraw-hill companies, inc. all rights...

1Glencoe Accounting Unit 2 Chapter 4 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Unit 2The Basic Accounting Cycle

Chapter 3 Business Transactions and the Accounting Equation

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital

Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals

Chapter 6 Recording Transactions in a General Journal

Chapter 7 Posting Journal Entries to General Ledger Accounts

Chapter 8 The Six-Column Work Sheet

Chapter 9 Financial Statements for a Sole Proprietorship

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

Chapter 11 Cash Control and Banking Activities


Chapter 4Transactions That Affect Assets, Liabilities, and Owner’s Capital

What You’ll Learn Prepare a chart of accounts. Explain the purpose of double-entry accounting. Identify the normal balance of accounts. Use T accounts to illustrate the rules of debit and

credit for asset accounts, liability accounts, and the owner’s capital account and to express the accounting equation.

Use T accounts to analyze transactions that affect assets, liabilities, and the owner’s capital account.


Chapter 4Transactions That Affect Assets, Liabilities, and Owner’s Capital

What You’ll Learn Calculate the account balances after recording

business transactions. Define the accounting terms introduced in this

chapter.


Main IdeaThe double-entry accounting system uses debits and credits. Debit means “left side” and credit means “right side.”

You Will Learn about the chart of accounts. about the double-entry accounting system.

Accounts and the Double-Entry Accounting System

SECTION 4.1


The Chart of AccountsA chart of accounts is a list of accounts used by a business. Accounts are grouped together in a ledger, also known as a general ledger. “Keeping the books” refers to maintaining accounts in the ledger.

Accounts are easier to locate in the ledger if they are numbered. A typical numbering system is as follows:

Asset accounts begin with 1. Liability accounts begin with 2. Owner’s equity accounts begin with 3. Revenue accounts begin with 4. Expense accounts begin with 5.


SECTION 4.1

6

CHART OF ACCOUNTS• Assets

– 101 Cash in Bank– 105 Accounts Rec.-

City News– 120 Delivery Equip.– 120 Delivery Equip.

• Liabilities– 201 Accts Pay-

Advertising– 205 Accts Pay-

North Shore Auto

• Owners Equity• 301 JB, Capital• 302 JB,

Withdrawals• Income Summary

• Expenses• Advertising Expense• Maintenance Expense• Rent Expense• Utilities Expense

• Revenue• 401 Delivery

Revenue


Double-Entry AccountingIf a business has many accounts, accountants use the double-entry accounting system to analyze and record a transaction.

The double-entry accounting system recognizes both the debit and credit side of a business transaction.


SECTION 4.1

Account Name

Left Side

Debit Side

Debit

Right Side

Credit Side

Credit


T AccountsThe T account is a tool for using the double-entry accounting system. It shows the dollar increase and decrease caused by a transaction.

The T account gets its name from being shaped like a T: Account name is on the top. The left side is used for debits. The right side is used for credits.

Lets illustrate these rules now


SECTION 4.1


The Rules of Debit and CreditIn double-entry accounting, for each debit in one account, there must be an equal credit in another account. The rules of debit and credit vary depending on the type of account.

Each account has a normal balance to record increases to the account. The word normal in this case means usual.


SECTION 4.1


Rules for Asset AccountsAsset accounts follow three rules for debit and credit:

It is increased on the debit side (left side). It is decreased on the credit side (right side). The normal balance is the increase or debit side.

Because the increase side is always on the debit side, asset accounts have a normal debit balance.


SECTION 4.1


Rules for Liability and Owner’s Capital AccountsLiability and owner’s capital accounts follow three rules for debit and credit:

It is increased on the credit side (right side). It is decreased on the debit side (left side). The normal balance is the increase or credit

side.


SECTION 4.1

12

• Please complete Section 1 Show Me What You Know

Glencoe Accounting Unit 2 Chapter 4 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter 4, Section 2 Applying the Rules of Debit and Credit

What Do You Think?How many T accounts would you need to analyze a transaction?


Main IdeaUse T accounts to analyze transactions.

You Will Learn a step-by-step method for analyzing transactions. how to apply the method to asset, liability, and

owner’s capital transactions.

Applying the Rules of Debit and Credit

SECTION 4.2


Asset and Equities TransactionWhen analyzing business transactions, you should

apply the rules of debit and credit, and complete the entry in T-account form.


SECTION 4.2


Asset and Equities TransactionWhen analyzing business transactions, you should follow this method:


SECTION 4.2




SECTION 4.2


Assets and Owner’s CapitalUse a T account to analyze an owner’s investment in the business:


SECTION 4.2




SECTION 4.2


Assets and LiabilitiesIncrease an asset and decrease another asset:


SECTION 4.2




SECTION 4.2


Assets and LiabilitiesIncrease an asset and increase a liability:


SECTION 4.2




SECTION 4.2


Assets and LiabilitiesDecrease a liability and decrease an asset:


SECTION 4.2




SECTION 4.2


Question 1Identify the normal balance for each of the following accounts by indicating Debit or Credit.Cash in Bank __________ Accounts Receivable __________ Richard Sims, Capital __________Computer Equipment __________ 1st National Bank (mortgage on building) __________Car Wash Equipment __________ Building __________Office Supplies __________

Chapter 4 ReviewCHAPTER 4


Answer 1 Step 1: Determine the account classification of each account.

Step 2: Determine the normal balance side. a. Cash in Bank is an asset account. Since assets are on

the left side of the accounting equation, they increase on the left side of the account and their normal balance is the debit side.

b. Accounts Receivable is an asset account. Assets increase on the left side of the account so their normal balance is debit.

(continued)



c. Richard Sims, Capital is an owner’s capital account. Capital accounts are on the right side of the accounting equation. Therefore, they increase on the right side of the account and their normal balance is the credit side.

d. Computer Equipment is an asset account. Assets increase on the left side of the account so their normal balance is debit.


Answer 1

Step 2

(continued)


e. The First National Bank account for the mortgage is a liability account. Liabilities are on the right side of the accounting equation. Therefore, increases are shown on the right side of the account and their normal balance is the credit side.

f. Car Wash Equipment is an asset account. Increases for assets appear on the left side of the account so their normal balance is debit.


Answer 1

Step 2

(continued)


g. Building is an asset account. Increases for assets appear on the left side of the account so their normal balance is debit.

h. Office Supplies is an asset account. Increases for assets appear on the left side of the account so their normal balance is debit.


Answer 1

Step 2 (continued)


Question 2 On October 18 Dick’s Car Wash bought $10,000 worth of car wash equipment by issuing Check #111. Using the Business Transaction Analysis method in your book, list the steps you would use to record this transaction. Assume that asset accounts for Cash in Bank and Car Wash Equipment exist.



Answer 2 Step 1: Identify the accounts affected.

The accounts Car Wash Equipment and Cash in Bank are affected.

Step 2: Classify the accounts affected.

Car Wash Equipment is an asset account. Cash in Bank is an asset account

Step 3: Determine the amount of increase or decrease for each account affected.

Car Wash Equipment is increased by $10,000. Cash in Bank is decreased by $10,000.

(continued)



Answer 2 Step 4: Which account is debited and for what amount?

Increases in asset accounts are recorded as debits. Debit Car Wash Equipment for $10,000.

Step 5: Which account is credited and for what amount?

Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $10,000.



Question 3 What does “double-entry accounting” mean?



Answer 3 Every transaction has two sides: a debit (left) side and a credit (right) side. If a business were to buy supplies for cash, two things would happen. First, the amount of supplies would go up, and since supplies are assets, the increase to the Supplies account would be recorded as a debit. Second, the balance in the Cash in Bank account would go down, and since cash is an asset, the decrease in Cash in Bank would be recorded as a credit.



Resources

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