Chapter 2-1

Analyzing Transactions into Debit and Credit Parts

Asset Accounts

• Cash• Prepaid Insurance• Supplies• Accounts Receivable(People who owe us

money—purchased services on account)

Liabilities

• Accounts Payable(people we owe money to)

Owner’s Equity

• Owner Name, Capital

Analyzing The Accounting Equation

• We could, theoretically, record every transaction directly into the Accounting Equation

• BUT, the number of accounts used by most businesses would make the accounting equation extremely complicated to use as a financial record

• A separate record is commonly used for each account

The Accounting Equation

• Assets = Liabilities + O.E.

• Remember the equation must always be in balance.

• Right side always equals the left side

Left Side Right Side

Accounts

• A record summarizing all of the information pertaining to a single item in the equation is known as an account– Each of these is an “account”

• Cash• Supplies• Accounts Receivable• Prepaid Insurance• Accounts Payable• Kim Park, Capital

Transactions

• Change the balances of accounts in the equation

• We started with all zeros and each transaction we did changed balances in the accounts

• An accounting device used to analyze transactions is called a T-Account

Amounts Recorded in T-Accounts

• There are special names for amounts recorded on the left and right sides of a T-Account

debit credit

• An amount recorded on the left side is called a “debit”

• An amount recorded on the right side is called a “credit”

• Abbreviations are “dr” for debit and “cr” for credit

Account Balances

• The side of the account that is INCREASED is called the Normal Balance

• Assets are increased on the left side of the equation and have normal “DEBIT” balances

• Liabilities are on the right side of the equation and have normal “CREDIT” balances

• Owner’s Capital is on the right side and has a normal “CREDIT” balance

Look At Page 29

• DEBIT means LEFT• CREDIT means RIGHT• They do not mean increase and decrease• They do not mean good and bad

Increases and Decreases in Accounts

• Remember the transactions in Chapter 1. • When we bought supplies with cash, one account

was increased, the other was decreased.• The “normal balance” side is always the side that the

account increases on.• Accounts decrease on the opposite side • Assets have normal “debit” balances so they

increase on the left side• Liabilities and Owner’s Capital accounts have normal

“credit” balances so they increase on the right side

Work Together, OYO 2-1

• Logon to Aplia• Do WT and OYO

2-2 Analyzing How Transactions Affect Accounts

• Let’s go back to the first transaction and breaking it down using T-Accounts

• August 1. Received cash from owner as an investment, $5000.00

• Page 32

Steps For Analyzing a Transaction Into Its Debit and Credit Parts

• 1. Which accounts are affected?• 2. How is each account classified?• 3. How is each classification changed?• 4. How is each amount entered in the

accounts?

Page 33

• August 3. Paid cash for supplies, $275.00• Look at Steps-Let’s answer them• Look at diagram on top of page 33.

Pages 34-36

• We are going to look at each of these transactions and do the T-Accounts on the board

Page 37

• 2-2 WT, OYO• Logon to Aplia

2-3 Analyzing How Transactions Affect Owner’s Equity Accounts

• Using the same steps that we did for section 2-2, let’s do the transactions on pages 38-39 together.

Transactions Involving Expenses

• Liabilities increase on the Credit or the right side of the equation

• Expenses DECREASE owner’s equity, therefore, they are considered separate accounts and have a normal Debit balance

• Owner’s Capital Increase on the Credit Side, and since expenses decrease owner’s equity, they are increased on the debit side

• CLEAR AS MUD??• Let’s try it• Page 40

Receiving Cash on Account

• Page 41

Paid Cash to Owner for Personal Use

• Page 42

Review 2-3

• Page 44• Logon to Aplia• WT, OYO 2-3