2 - 1 debits and credits – analyzing and recording business transactions chapter 2
TRANSCRIPT
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Business Transactions
1 Owner invests cash in a business.2 Owner buys business assets.3 Services are performed and cash received.4 Services are performed and billed to
customers as accounts receivable.5 Business expenses are incurred and paid for
with cash or paid for later.
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DocumentingBusiness Transactions
Analyze events (transactions). Decide which accounts are affected. Choose the account category. Determine whether the event will cause an
increase or decrease to the account. Record the transaction with proper debits
and credits.
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Debits and Credits
Every transaction must be recorded. Every transaction must affect at least two
accounts. Debits must equal credits. The accounting equation must be in
balance.
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Left Right
Debit Credit
Learning Unit 2-1
A T account is a format used to show the effect of transactions.
Dollar signs ($) are not used in accounts.
T account
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Learning Unit 2-1
The Ledger Account
Balance
Account: Cash Account: 1000
Date ref. debit credit debit credit
June 1 5,000 5,000
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Debits and Credits
What is the definition of debit? The left side of any T account. A number entered on the left side of any account
is said to be debited to an account.
What is the definition of credit? The right side of any T account. A number entered on the right side of any account
is said to be credited to an account.
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Account Name (Title)
Left side/Dr. (debit)
Right side/Cr. (credit)
Account Name (Title)
Debits and Credits
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Balancing an Account
T accounts:1 Add each side (debit & credit side).2 Foot the account by writing the numbers in
small type at the bottom of each side.3 Calculate the ending balance by subtracting the
smaller side from the larger side. Ledger accounts: Some types contain a running balance.
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Recording transactions inT accounts according to
the rules of debit and credit.
Learning Objective 2
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Learning Unit 2-2
Recording Business Transactions: Debits and Credits
T accounts will be used. Remember the accounting equation:
Assets = Liabilities + Owner’s Equity
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*Dr. (Debit)
assetsexpenses
withdrawals
AccountCategories
Rules of Debit & Credit
A normal balance of an account is theincrease side.*
Normal Balance
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Rules of Debit & Credit
A normal balance of an account is theincrease side.*
Normal Balance
liabilitiescapital
revenue
*Cr. (Credit)
AccountCategories
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Chart of Accounts
This is a list of all accounts to be used by a business.
Each business entity has accounts which relate to its type of business activities.
Balance sheet accounts are assigned numbers beginning with a 1, 2, or 3.
Income statement account numbers start with either a 4 or a 5.
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Balance Sheet
Assets
1000 Cash
1020 Accounts Receivable
1030 Office Supplies
1040 Computer Equipment
1050 Office Equipment
Chart of Accounts
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Balance Sheet
Liabilities
2000 Accounts Payable
Owner’s Equity
3010 Capital
3020 Withdrawals
Chart of Accounts
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Revenue4000 Service RevenueExpenses5010 Advertising Expense5020 Rent Expense5030 Utilities Expense5040 Phone Expense5050 Supplies Expense5060 Insurance Expense5070 Postage Expense
Income Statement
Chart of Accounts
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Clara J. Accounting Practice Example
Assets1000 Cash $4,5001020 Accounts Receivable1030 Office Supplies 3001040 Computer Equipment 1,2001050 Office Equipment
Total $6,000
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Clara J. Accounting Practice Example
Expenses5010 Advertising Expense $ 3005020 Rent Expense 4005030 Utilities Expense 2005040 Phone Expense5050 Supplies Expense5060 Insurance Expense5070 Postage Expense
Total $ 900Assets + Expenses $6,900
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Clara J. Accounting Practice Example
Liabilities2000 Accounts Payable $ 300Owner’s Equity3010 Capital 5,0003020 WithdrawalsRevenue4000 Service Revenue 1,600
Total $6,900
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Enter Transactions Example
During the month of July the following transactions took place.
g Received a $155 telephone bill which will be paid later.
h Paid $150 for insurance coverage.i Paid $200 for the supplies previously
purchased.
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Enter Transactions Example
j Performed $850 of services on account.k Paid another $85 for the supplies previously
purchased.
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Phone Expense g) 155
Accounts Payable 300
g) 155
Enter Transactions Example
g Debit Phone Expense and credit Accounts Payable which increases both accounts’ normal balances.
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Enter Transactions Example
h Debit Insurance Expense and credit Cash which increases an expense and decreases an asset.
Insurance Expenseh) 150
Cash 4,500
h) 150
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Enter Transactions Example
i Debit Accounts Payable and credit Cash which decreases both accounts’ balances.
Cash 4,500 h) 150
i) 200
Accounts Payable 300 i) 200 g) 155
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Enter Transactions Example
j Debit Accounts Receivable and credit Revenue which increases the normal balance of both accounts.
Accounts Receivable j) 850
Service Revenue 1,600 j) 850
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Enter Transactions Example
k Debit Accounts Payable and credit Cash which increases the normal balance of both accounts.
Accounts Payable300
i) 200 g) 155 k) 85
Cash 4,500 h) 150
i) 200k) 85
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Assets1000 Cash $4,0651020 Accounts Receivable 8501030 Office Supplies 3001040 Computer Equipment 1,2001050 Office Equipment
Total $6,415
Learning Unit 2-3
Clara J. Accounting PracticeTrial Balance
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Clara J. Accounting Practice Trial Balance
Expenses5010 Advertising Expense $ 3005020 Rent Expense 4005030 Utilities Expense 2005040 Phone Expense 1555050 Supplies Expense5060 Insurance Expense 1505070 Postage Expense
Total $1,205Assets + Expenses $7,620
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Clara J. Accounting Practice Trial Balance
Liabilities2000 Accounts Payable $ 170Owner’s Equity3010 Capital 5,0003020 WithdrawalsRevenue4000 Service Revenue 2,450
Total $7,620
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Clara J. Accounting Practice Income Statement
Clara J. Accounting PracticeIncome Statement
Year Ended July 31, 20xx
Revenues (fees earned) $2,450Expenses:
Advertising Expense 300Utilities and Telephone Expenses 355Rent Expense 400Insurance Expense 150 1,205
Net Income $1,245
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Clara J. Accounting Practice Statement of Owner’s Equity
Clara J., Capital, June 1, 200x $ 0Contribution Of Capital 5,000Net Income 1,245Clara J., Capital, July 31, 200x $ 6,245
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Clara J. Accounting Practice Balance Sheet
Clara J. Accounting PracticeBalance SheetJuly 31, 200x
AssetsCash $4,065Acct. Rec. 850Supplies 300Equipment 1,200Total Assets $6,415
Liabilities and Owner’s EquityAccounts Payable $ 170Owner’s EquityClara J., Capital 6,245
Total $6,415