Analyzing Transactions into Debit and Credit PartsPRINCIPLES OF ACCOUNTING I

Objectives

• By the end of the lesson, I will be able to:

• 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.

• verify the equality of debits and credits for each transaction.

What We Know

• We have learned how business transactions affect accounts in an accounting equation.

• Procedure is not practical in an actual accounting system.

• the number of accounts most businesses have would make the accounting equation cumbersome to use

• a separate record is commonly used for each account

Accounting Terms• Accounting equation: shows relationship among assets,

liabilities, and owner’s equity

• Asset: anything of value that is owned or controlled

• Capital: account used to summarize the owner’s equity

• Chart of accounts: list of accounts used in a business

• Credit: amount recorded on the right side of a T-account

• Debit: amount recorded on the left side of a T-account

• Liability: amount of money owed to the creditors of a business

• Normal balance: side of the account that is increased

• Owner’s equity: amount remaining after the value of all liabilities is subtracted from the value of all assets

• T-account: accounting device used to analyze transactions

• Transaction: business activity that changes assets, liabilities, or owner’s equity

The Accounting Equation

Assets = Liabilities + Owner’s Equity

• The accounting equation can be represented as a “T”:

• Always draw T accounts when analyzing transactions to see the debit and credit sides.

What Does a T Account Look Like?

Location, location, location

• The normal balance side of an asset, liability, or capital account is based on the location of the account in the accounting equation

All about the sides….

• The sides of the T account also show increases and decreases in account balances

Rules

• Two basic accounting rules regulate the increases and decreases of account balances:

• Account balances increase on the normal side of an account

• Account balances decrease on the opposite side of an account

Remember This…• Asset accounts have normal debit balances

• increase on the debit side

• decrease on the credit side

• Liability accounts have normal credit balances

• increase on the credit side

• decrease on the debit side

• Owner’s equity account has a normal credit balance

• increases on the credit side

• decreases on the debit side

Let’s Review

• The normal balance side of an asset, liability, or capital account is based on what?

• The sides of the T account show what?

• Assets account have normal __________ balances.

• Liability accounts have normal __________balances.

• Owner’s Equity accounts have normal __________balances.

Analyze This….• Before a transaction is recorded in the records of a

business, the information is analyzed to determine which accounts are changed and how.

• Each transaction changes the balances of at least two accounts and debits equal credits for each transaction.

• Four steps are used in analyzing a transaction:• Determine what accounts will be affected• Determine whether to increase or decrease the

account• Determine whether the increase/decrease needs to be

a debit or a credit

• Make sure debits equal credits

Let’s Do This Together• Using the Graphic Organizer, we will analyze

the following transactions:

• Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service.

• Maria Sanchez transferred two telephones valued at $200 each from her home to the business.

• Roadrunner bought a used truck on account from North Shore Auto for $12,000.

• Roadrunner sold one telephone to Green Company for $200 on account.

On Your Own….

• Using Microsoft Excel, you will create T accounts and basic formulas to analyze the transactions on your John Jones Computing handout.

Ticket Out of the Door

• List the normal balances Assets, Liabilities, and Owner’s Equity