Unit 2
The Basic Accounting Cycle
Chapter 3
Business Transactions and the Accounting Equation
Chapter 4
Transactions That Affect Assets, Liabilities, and Owner’s Capital
Chapter 5
Transactions That Affect Revenue, Expenses, and Withdrawals
Chapter 6
Recording Transactions in a General Journal
Chapter 7
Posting Journal Entries to General Ledger Accounts
Chapter 8
The Six-Column Work Sheet
Chapter 9
Financial Statements for a Sole Proprietorship
Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
Chapter 11 Cash Control and Banking Activities
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Chapter 4
Transactions That Affect Assets,
Liabilities, and Owner’s Capital
What You’ll Learn




Prepare a chart of accounts.
Explain the purpose of double-entry accounting.
Identify the normal balance of accounts.
Use T accounts to illustrate the rules of debit and
credit for asset accounts, liability accounts, and the
owner’s capital account and to express the
accounting equation.
 Use T accounts to analyze transactions that affect
assets, liabilities, and the owner’s capital account.
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Chapter 4
Transactions That Affect Assets,
Liabilities, and Owner’s Capital
What You’ll Learn
 Calculate the account balances after recording
business transactions.
 Define the accounting terms introduced in this
chapter.
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Chapter 4, Section 1
Accounts and the Double-Entry
Accounting System
What Do You Think?
Based on what you have reviewed about transactions,
why do you think we use a double-entry accounting
system?
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
Main Idea
The double-entry accounting system uses debits and
credits. Debit means “left side” and credit means “right
side.”
You Will Learn
 about the chart of accounts.
 about the double-entry accounting system.
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Accounts and the Double-Entry
Accounting System
SECTION 4.1
Key Terms







chart of accounts
ledger
double-entry accounting
debit
credit
T account
normal balance
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
The Chart of Accounts
A chart of accounts is a list of accounts used by a
business. Accounts are grouped together in a ledger,
also known as a general ledger. “Keeping the books”
refers to maintaining accounts in the ledger.
Accounts are easier to locate in the ledger if they are
numbered. A typical numbering system is as follows:
 Asset accounts begin with 1.
 Liability accounts begin with 2.
 Owner’s equity accounts begin with 3.
 Revenue accounts begin with 4.
 Expense accounts begin with 5.
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
Double-Entry Accounting
If a business has many accounts, accountants use the
double-entry accounting system to analyze and record
a transaction.
The double-entry accounting system recognizes both
the debit and credit side of a business transaction.
Account Name
Left Side
Right Side
Debit Side
Credit Side
Debit
Credit
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
T Accounts
The T account is a tool for using the double-entry
accounting system. It shows the dollar increase and
decrease caused by a transaction.
The T account gets its name from being shaped like a T:
 Account name is on the top.
 The left side is used for debits.
 The right side is used for credits.
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
The Rules of Debit and Credit
In double-entry accounting, for each debit in one
account, there must be an equal credit in another
account. The rules of debit and credit vary depending on
the type of account.
Each account has a normal balance to record
increases to the account. The word normal in this case
means usual.
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
Rules for Asset Accounts
Asset accounts follow three rules for debit and credit:
 It is increased on the debit side (left side).
 It is decreased on the credit side (right side).
 The normal balance is the increase or debit side.
Because the increase side is always on the debit side,
asset accounts have a normal debit balance.
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
Rules for Liability and Owner’s Capital Accounts
Liability and owner’s capital accounts follow three rules
for debit and credit:
 It is increased on the credit side (right side).
 It is decreased on the debit side (left side).
 The normal balance is the increase or credit side.
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
Key Terms Review
 chart of accounts
A list of all accounts used by a business.
 ledger
A group of accounts; also referred to as a general
ledger.
 double-entry accounting
A system that recognizes the different sides of
business transactions as debits and credits.
 debit
An entry on the left side of an account.
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SECTION 4.1
Accounts and the Double-Entry
Accounting System
Key Terms Review
 credit
An agreement to pay for a purchase at a later
time; an entry on the right side of an account.
 T account
A visual representation of a ledger account. The
T account is a tool used to analyze transactions.
 normal balance
The increase side of an account. The word
normal here means usual.
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Chapter 4, Section 2
Applying the Rules of Debit and Credit
What Do You Think?
How many T accounts would you need to analyze
a transaction?
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SECTION 4.2
Applying the Rules of
Debit and Credit
Main Idea
Use T accounts to analyze transactions.
You Will Learn
 a step-by-step method for analyzing transactions.
 how to apply the method to asset, liability, and
owner’s capital transactions.
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SECTION 4.2
Applying the Rules of
Debit and Credit
Asset and Equities Transaction
When analyzing business transactions, you should
 apply the rules of debit and credit, and
 complete the entry in T-account form.
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SECTION 4.2
Applying the Rules of
Debit and Credit
Asset and Equities Transaction
When analyzing business transactions, you should
follow this method:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Asset and Equities Transaction
When analyzing business transactions, you should
follow this method:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Asset and Equities Transaction
When analyzing business transactions, you should
follow this method:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Owner’s Capital
Use a T account to analyze an owner’s investment in the
business:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Owner’s Capital
Use a T account to analyze an owner’s investment in the
business:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Owner’s Capital
Use a T account to analyze an owner’s investment in the
business:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and increase a liability:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and increase a liability:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and increase a liability:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Decrease a liability and decrease an asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Decrease a liability and decrease an asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Decrease a liability and decrease an asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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SECTION 4.2
Applying the Rules of
Debit and Credit
Assets and Liabilities
Increase an asset and decrease another asset:
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CHAPTER 4
Chapter 4 Review
Question 1
Identify the normal balance for each of the following
accounts by indicating Debit or Credit.
Cash in Bank
__________
Accounts Receivable
__________
Richard Sims, Capital
__________
Computer Equipment
__________
1st National Bank (mortgage on building) __________
Car Wash Equipment
__________
Building
__________
Office Supplies
__________
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CHAPTER 4
Chapter 4 Review
Answer 1
Step 1: Determine the account classification of each account.
Step 2: Determine the normal balance side.
a. Cash in Bank is an asset account. Since assets are on
the left side of the accounting equation, they increase on
the left side of the account and their normal balance is
the debit side.
b. Accounts Receivable is an asset account. Assets
increase on the left side of the account so their normal
balance is debit.
(continued)
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Chapter 4 Review
CHAPTER 4
Answer 1
Step 2
c.
d.
Richard Sims, Capital is an owner’s capital
account. Capital accounts are on the right side of
the accounting equation. Therefore, they increase
on the right side of the account and their normal
balance is the credit side.
Computer Equipment is an asset account. Assets
increase on the left side of the account so their
normal balance is debit.
(continued)
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Chapter 4 Review
CHAPTER 4
Answer 1
Step 2
e.
f.
The First National Bank account for the
mortgage is a liability account. Liabilities are on
the right side of the accounting equation.
Therefore, increases are shown on the right side
of the account and their normal balance is the
credit side.
Car Wash Equipment is an asset account.
Increases for assets appear on the left side of
the account so their normal balance is debit.
(continued)
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Chapter 4 Review
CHAPTER 4
Answer 1
Step 2 (continued)
g.
h.
Building is an asset account. Increases for assets
appear on the left side of the account so their
normal balance is debit.
Office Supplies is an asset account. Increases
for assets appear on the left side of the account
so their normal balance is debit.
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CHAPTER 4
Chapter 4 Review
Question 2
On October 18 Dick’s Car Wash bought $10,000 worth of
car wash equipment by issuing Check #111. Using the
Business Transaction Analysis method in your book, list the
steps you would use to record this transaction. Assume
that asset accounts for Cash in Bank and Car Wash
Equipment exist.
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CHAPTER 4
Chapter 4 Review
Answer 2
Step 1: Identify the accounts affected.
The accounts Car Wash Equipment and Cash
in Bank are affected.
Step 2: Classify the accounts affected.
Car Wash Equipment is an asset account. Cash
in Bank is an asset account
Step 3: Determine the amount of increase or decrease
for each account affected.
Car Wash Equipment is increased by $10,000.
Cash in Bank is decreased by $10,000.
(continued)
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CHAPTER 4
Chapter 4 Review
Answer 2
Step 4: Which account is debited and for what amount?
Increases in asset accounts are recorded as
debits. Debit Car Wash Equipment for $10,000.
Step 5: Which account is credited and for what amount?
Decreases in asset accounts are recorded as
credits. Credit Cash in Bank for $10,000.
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CHAPTER 4
Chapter 4 Review
Question 3
What does “double-entry accounting” mean?
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CHAPTER 4
Chapter 4 Review
Answer 3
Every transaction has two sides: a debit (left) side and a
credit (right) side. If a business were to buy supplies for
cash, two things would happen. First, the amount of
supplies would go up, and since supplies are assets, the
increase to the Supplies account would be recorded as a
debit. Second, the balance in the Cash in Bank account
would go down, and since cash is an asset, the decrease
in Cash in Bank would be recorded as a credit.
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