Transactions That Affect Assets, Liabilities, and Owner’s Equity

Transactions That Affect Assets, Liabilities, and Owner’s EquityMaking Accounting Relevant

Accounting and finance professionals

are key to every business operation.

Making Accounting Relevant

Accounting and finance professionals

are key to every business operation.

How might the work performed by the accountant affect the day-to-day decisions made by the business owner?

How might the work performed by the accountant affect the day-to-day decisions made by the business owner?

Section 1Accounts and the Double-Entry Accounting System

Section 1Accounts and the Double-Entry Accounting System

What You’ll Learn

How to use T accounts.

Why you need a ledger.

The rules of debit and credit.

What You’ll Learn

How to use T accounts.

Why you need a ledger.

The rules of debit and credit.

Why It’s ImportantThe rules of debit and credit are the

basis for entering transactions into the records of a business.

Why It’s ImportantThe rules of debit and credit are the

basis for entering transactions into the records of a business.

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Key Terms ledger chart of accounts double-entry accounting T account debit credit normal balance

Key Terms ledger chart of accounts double-entry accounting T account debit credit normal balance

The Chart of AccountsA list of all the accounts and their

assigned account numbers.

The Chart of AccountsA list of all the accounts and their

assigned account numbers.

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Roadrunner Delivery Service155 Gateway Blvd.

Sacramento, CA 94230

CHART OF ACCOUNTS

ASSETS 101 Cash in Bank105 Accounts Receivable--City News110 Accounts Receivable--Green Company115 Computer Equipment120 Office Equipment125 Delivery Equipment

LIABILITIES 201 Accounts Payable--Beacon Advertising205 Accounts Payable--North Shore Auto

OWNER’S EQUITY 301 Maria Sanchez, Capital302 Maria Sanchez, Withdrawals303 Income Summary

REVENUE 401 Delivery Revenue

EXPENSES 501 Advertising Expense505 Maintenance Expense510 Rent Expense515 Utilities Expense

Roadrunner Delivery Service155 Gateway Blvd.

Sacramento, CA 94230

CHART OF ACCOUNTS

ASSETS 101 Cash in Bank105 Accounts Receivable--City News110 Accounts Receivable--Green Company115 Computer Equipment120 Office Equipment125 Delivery Equipment

LIABILITIES 201 Accounts Payable--Beacon Advertising205 Accounts Payable--North Shore Auto

OWNER’S EQUITY 301 Maria Sanchez, Capital302 Maria Sanchez, Withdrawals303 Income Summary

REVENUE 401 Delivery Revenue

EXPENSES 501 Advertising Expense505 Maintenance Expense510 Rent Expense515 Utilities Expense

Double-Entry Accounting

Double-entry accounting is a

system of recordkeeping in which

each business transaction affects

at least two accounts.

Double-Entry Accounting

Double-entry accounting is a

system of recordkeeping in which

each business transaction affects

at least two accounts.

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

T AccountsThe T account, so called because

of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction.

T AccountsThe T account, so called because

of its T shape, shows the dollar increase or decrease in an account that is caused by a transaction.

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Account Name

Left Side Right Side

Debit Side Credit Side

Debit Credit

Account Name

Left Side Right Side

Debit Side Credit Side

Debit Credit

The Rules of Debit and Credit

The rules of debit and credit vary

according to whether an account is

classified as an asset, a liability, or

an owner’s capital account.

Normal balance is always on the

side used to record increases to the

account. The word normal used

here means usual.

The Rules of Debit and Credit

The rules of debit and credit vary

according to whether an account is

classified as an asset, a liability, or

an owner’s capital account.

Normal balance is always on the

side used to record increases to the

account. The word normal used

here means usual.

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Rules for Asset AccountsRules for Asset Accounts

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Assets

Credit

–(2) Decrease Side

Debit

+

(1) Increase Side

(3) Normal Balance

Rules for Liability and Owner’s Capital AccountsRules for Liability and Owner’s Capital Accounts

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Liabilities

Debit Credit

– +

(1) Increase Side

(3) Normal Balance

Debit

–

(2) Decrease

Side

Owner’s Equity

Debit Credit

– +

(2) Decrease (1) Increase Side Side

(3) Normal Balance

Credit

+

(1) Increase

Side

(3) Normal

Balance

Check Your UnderstandingCheck Your Understanding

Explain why the normal

balance of an asset account is

on the debit side of the

account.

Explain why the normal

balance of an asset account is

on the debit side of the

account.

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 1 Accounts and the Double-Entry Accounting System (cont'd.)

Section 2 Applying the Rules of Debit and Credit

Section 2 Applying the Rules of Debit and Credit

What You’ll Learn

How to analyze a transaction affecting

assets, liabilities, and owner’s equity.

What You’ll Learn

How to analyze a transaction affecting

assets, liabilities, and owner’s equity.

Why It’s Important

You need to analyze transactions

properly so that you record them

correctly.

Why It’s Important

You need to analyze transactions

properly so that you record them

correctly.

Business Transaction Analysis: Steps to SuccessBusiness Transaction Analysis: Steps to Success

Business Transaction

ANALYSIS Identify 1. Identify the accounts affected.

Classify 2. Classify the accounts affected.

+ / - 3.Determine the amount of increase or decrease for each account affected.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Business Transaction Analysis: Steps to Success (cont'd.)

Business Transaction Analysis: Steps to Success (cont'd.)

Business Transaction

DEBIT-CREDIT RULE 4. Which account is debited? For what amount?

5. Which account is credited? For what amount?

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Business Transaction Analysis: Steps to Success (cont'd.)

Business Transaction Analysis: Steps to Success (cont'd.)

Business Transaction

T ACCOUNTS 6. What is the complete entry in T-account form?

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Account Name Account Name

Business Transaction AnalysisBusiness Transaction AnalysisBusiness Transaction 1

ANALYSIS Identify 1. The accounts Cash in Bank and Maria Sanchez, Capital are affected.Classify 2. Cash in Bank is an asset account. Maria Sanchez, Capital is an owner’s capital account. + / - 3. Cash in Bank is increased by $25,000. Maria Sanchez, Capital is increased by $25,000.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 1, 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.

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 1 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Cash in Bank for $25,000.

5. Increases in the owner’s capital account are recorded as credits. Credit Maria Sanchez, Capital for $25,000.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 1, 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.

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 1 (cont'd.)

T ACCOUNTS 6.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 1, 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, Cash in Bank Capital

Debit

+

25,000

Credit

+

25,000

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 3

ANALYSIS Identify 1. The accounts Computer Equipment and Cash in Bank are affected.

Classify 2. Computer Equipment and Cash in Bank are asset accounts.

+ / – 3. Computer Equipment is increased by $3,000. Cash in Bank is decreased by $3,000.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 3 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Computer Equipment for $3,000.

5.Decreases in asset accounts are recorded as credits. Credit Cash in Bank for $3,000.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 3 (cont'd.)

T ACCOUNTS 6.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 4, Roadrunner issued Check 101 for $3,000 to buy a computer system.

Computer Equipment Cash in Bank

Debit

+

3,000

Credit

–

3,000

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 4

ANALYSIS Identify 1. The accounts Delivery Equipment and Accounts Payable—North Shore Auto are affected.

Classify 2. Delivery Equipment is an asset account. Accounts Payable—North Shore Auto is a liability account.

+ / – 3. Delivery Equipment is increased by $12,000. Accounts Payable— North Shore Auto is increased by $12,000.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 4 (cont'd.)

DEBIT-CREDIT RULE 4. Increases in asset accounts are recorded as debits. Debit Delivery Equipment for $12,000.

5. Increases in liability accounts are recorded as credits. Credit Accounts Payable—North Shore Auto for $12,000.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

Business Transaction Analysis (cont'd.)Business Transaction Analysis (cont'd.)

Business Transaction 4 (cont'd.)

T ACCOUNTS 6.

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)

On October 9, Roadrunner bought a used truck on account from North Shore Auto for $12,000.

Delivery Accounts Payable— Equipment North Shore Auto

Debit

+

12,000

Credit

+

12,000

Check Your UnderstandingCheck Your Understanding

In double-entry accounting, for

each transaction there must be at

least two entries. If you are

increasing the Cash in Bank

account, what other accounts

might be affected?

In double-entry accounting, for

each transaction there must be at

least two entries. If you are

increasing the Cash in Bank

account, what other accounts

might be affected?

Section 2 Applying the Rules of Debit and Credit (cont'd.)

Section 2 Applying the Rules of Debit and Credit (cont'd.)