Chapter 2-1
Analyzing Transactions into Debit
and Credit Parts
Asset Accounts
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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
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Assets
Left Side
= Liabilities + O.E.
Right Side
• Remember the equation must always be in
balance.
• Right side always equals the left 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”
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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 TAccounts
• 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
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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
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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