Chapter 3 Lecture Notes
In chapter 2 you learned how to prepare financial statements and the basic
relationship in the accounting equation; remember, Assets = Liabilities +
Owner’s Equity. In this chapter you will be introduced to tools that
accountants use in analyzing business transactions and the chart of accounts.
The T account is a tool used to illustrate transactions. T accounts resemble
the letter T; the name of the account is written on top of the T, the debits
are on the left side and the credits are on the right side. T accounts
simplify recordkeeping by grouping similar transactions together. When
recording an increase to an asset account, you will place increases on the left
(debit) side – remember that assets are on the left side of the accounting
equation. You will place increases to the liabilities and owner’s capital
accounts on the right side (credit) of the T – remember that liabilities and
owner’s equity are on the right side of the accounting equation. (**Many
people have trouble thinking in terms of debit and credit; if you need to
think of it as left and right until you get the hang of it – see page 71 for a
chart). It is important that the equation remain in balance; the balances of
all T accounts will result in a balanced accounting equation. The procedure
for getting the balance of a T account is as follows: 1) total all amounts on
the debit (left) side, 2) total all amounts on the credit (right) side, and 3)
subtract the smaller from the larger amount to get the balance. Remember
– debits are always on the left side, credits are always on the right side, and
the normal balances for each account correspond to which side of the
accounting equation they are on.
Once you have the balance for each T account you may prepare the Trial
Balance. This is not a formal financial statement, but rather a statement
which tests the accuracy of total debits and total credits after the
transactions have been recorded. If the debits do not equal the credits,
there are several possible errors – see page 73 for a list of common errors
and how to find them. It is important to note, that even if the trial balance
balances, this does not mean that there are no errors.
Finally you come to the chart of accounts – this is a list of the company’s
accounts which are numbered for quick reference and identification. Not all
companies will use the same numbers for each account, but the same format
is generalized.
Permanent and temporary accounts are introduced at the end of the chapter,
it will be important to remember the difference when you get to closing
entries in chapter 6. Remember, in accounting everything you learn builds on
a previous concept so it is necessary to retain the information as you go.