Analyzing Transactions in Debit & Credit Parts
Chapter 3
Recording account balances in an accounting equation like we’ve done in chapters 1 & 2 would not be
practical in a real business. They would have so many account titles; the paper would have to be huge.
Instead, we’ll start using T-accounts to analyze transactions.
3-1 Using T Accounts
I.
Account = a record summarizing all the info pertaining to a single item in the accounting
equation.
T account = an accounting device used to analyze transactions
II.
Left
Debit
Right
Credit
***When using T Accounts write them up under one another rather than side-by-side to make it easier to
recognize debits and credits. REMEMBER: Debits and credits must equal after each transaction
A. Account Balances
1. Normal Balance – the side of the account that is increased
2. Assets on left side of equation, so normal balance side is left
3. Liabilities and Owner’s Equity are on the right side of the equation, so normal balance
side is right.
B. Two rules for increasing and decreasing account balances
1. Always increase on normal balance side of account
2. Always decrease on opposite side of normal balance
Assets
Normal
Balance
=
Liabilities
+
Normal
Balance
3-2 Analyzing How Transactions Affect Accounts
I. 4 Questions used in analyzing transactions into debit and credit parts:
1. Which accounts are affected?
2. How is it classified? (Asset, Liability, OE…)
3. Did it go up or down?
4. How is it entered? (Debit or Credit)
II. Chart of accounts = list of account titles used by the business
III. Sample transactions
1. Received cash from owner as an investment
Cash
Bal
Name of owner, Capital
Bal
Owner’s Equity
Normal
Balance
2. Paid cash for supplies
Cash
Supplies
Bal
Bal
3. Paid cash for insurance
Cash
Prepaid Insurance
Bal
Bal
4. Bought supplies on account from So and So
Supplies
Accounts Payable – So and So
Bal
Bal
5. Paid cash on account to So and So
Cash
Accounts Payable – So and So
Bal
Bal
3-3 Analyzing How Transactions Affect Owner’s Equity Accounts
I. Sales
A. Sales now has its own account because:
1. To avoid having too many entries in Capital and
2. To summarize revenue info separately
B. Since Revenues increase OE, then the balance side for revenues will be on the credit (same
side that increases OE)
III. Sample transactions
6. Received cash from sales
Cash
Bal
Sales (Revenue)
Bal
7. Sold services on account
Accounts Receivable- So and
Sales
Bal
Bal
I. Expenses
A. Expenses now has their own accounts too because:
1. To avoid having too many entries in Capital and
2. To summarize expense info separately
B. Since Expenses decrease OE, then the balance side for expenses will be on the debit (same
side that decreases OE)
Owner’s Equity
Bal
8. Paid Cash for an Expense (rent, utilities, advertising, etc)
Cash
? Expense
Bal
Bal
The amount it is costing us for rent just
increased.
9. Received cash on account
Cash
Bal
Accounts Receivable – So and So
Bal
I. Withdrawals
A. Withdrawals are now recorded in its own account, Drawing, too because:
1. To avoid having too many entries in Capital and
2. To summarize withdrawal info separately
Since Withdrawals decrease OE, then the balance side for withdrawals will be on the debit (same
side that decreases OE)
Owner’s Equity
Bal
10. Paid cash to owner for personal use
Cash
Bal
Name of owner, Drawing
Bal