Accounting 10
Module 1
Lesson 4
Accounting 10
1
Lesson 4
Accounting 10
2
Lesson 4
Lesson Four - Using Accounts
Read pages 73 to 90 in the textbook.
Topics:
•
Introduction
•
Establishing Accounts
•
Recording Asset and Liability Changes in T-Accounts
•
Remember These Important Points
•
Do You Understand?
•
Conclusion
•
Self Test
•
Answers for Self Test
•
Assignment 4
After studying Lesson 4, you should be able to
•
open a T-account for each asset and liability element found on the opening balance
sheet of a service firm that is owned and operated as a single proprietorship.
•
explain and use the rules for recording increases and decreases in asset and
liability accounts.
•
calculate accurately the balance of any T-Account and indicate whether the balance
is debit or credit.
Accounting 10
3
Lesson 4
Introduction
Recording changes directly on the accounting equation, or preparing a new equation, or a
new balance sheet right after each transaction, are inefficient ways to record the daily
changes to an asset like Cash, or to any other element in the accounting equation.
What is clearly needed is some device to record each increase and decrease to every item
under any element within the accounting equation. In the language of accounting, this
device is known as the account.
An account is a device for recording the effects of transactions under one title.
Establishing Accounts
Defining Debits and Credits
The simplest form of an account is a T-account because it is shaped like a large T.
In the language of accounting, the left side of every account is known as the debit side.
The right side is known as the credit side.
Account Title
Debit Side
(Dr.)
Left
Accounting 10
Credit Side
(Cr.)
Right
4
Lesson 4
Opening Accounts
A separate T-account is set up for each element in the accounting equation. The first
accounting equation for Stacom Travel follows:
Assets
=
Liabilities
+ Owner's Equity
Accts.
Office
Bk. Loan
Accts.
Rob, Ireland
Cash
Rec.
Equip.
Furn
Payable
Pay.
Capital
L.Baines
$28 000 + $1 000 + $11 000 + $10 000 = $10 000 + $10 000 + $30 000
Cash
28 000
Office Equip.
11 000
Accts. Rec./
Lee Baines
Bank Loan Pay.
1 000
Furniture
10 000
Accts. Pay.
A&B Furn. Co.
10 000
6 000
Rob Ireland,
Capital
30 000
Accts. Pay.
Office Equip.
Co.
4 000
Each account begins with amounts located on the same side as they appear in the
beginning accounting equation. These are called opening balances.
•
All asset accounts will show their beginning balances on the left (debit) side.
Assets are located on the left side of the accounting equation.
•
For the asset Accounts Receivable, the customer's name is written together with the
title, Accts. Rec., the abbreviation for Accounts Receivable.
•
All liability accounts will show their beginning balances on the right (credit) side.
Liability accounts are located on the right side of the accounting equation.
Accounting 10
5
Lesson 4
•
A separate account is opened for each creditor so that the amount that is owed to
each can be quickly calculated. Furthermore, notice the abbreviation, Accts. Pay.,
is placed before the creditor's name to identify it as an account payable.
•
Since T-accounts are not formal financial reports, dollar signs are not required
when recording dollar amounts.
Opening the Ledger
When accounts are opened for all assets, liabilities, and owner's equity, the entire group
forms a record called the ledger. A ledger is defined as a file or a group of accounts.
The ledger for Stacom Travel contains all of the accounts of the beginning accounting
equation. These were in relation to their position in the accounting equation and the
beginning balance sheet. The debit or left-side balances represent the assets in the
equation, while the total credit or right-side balances represent the total liabilities plus
owner's equity.
The balances of the accounts in the ledger will always show that the total debits are equal
to the total credits.
Accounting 10
6
Lesson 4
Cash
28 000
Accts. Rec./
Lee Baines
1 000
Office Equip.
11 000
Bank Loan Pay.
Rob Ireland,
Capital
10 000
Accts. Pay.
A&B Furn. Co.
Furniture
10 000
30 000
Accts. Pay.
Office Equip.
Co.
6 000
Total Debit (left) Balances:
28 000
1 000
11 000
10 000
Total Credit (right) Balances:
10 000
6 000
4 000
30 000
50 000 (total debits)
50 000 (total credits)
=
4 000
This may be shown in the Summary of Ledger Account Balances below:
Stacom Travel
Summary of Ledger Account Balances
as at September 30, 20-Total Debit (Left) Balances
Total Credit (Right) Balances
Cash
Accts. Rec./Lee Baines
Office Equipment
Furniture
$28 000.00
1 000.00
11 000.00
10 000.00
Bank Loan Payable
Accts. Pay./A & B Furn. Co.
Accts. Pay./Office Equip. Co.
Rob Ireland, Capital
$10 000.00
6 000.00
4 000.00
30 000.00
Total Debits
$50 000.00
Total Credits
$50 000.00
Total Assets
$50 000.00
Total Liab. + Owner's Equity
$50 000.00
Accounting 10
=
7
Lesson 4
Recording Asset and Liability Changes in T-Accounts
Rule for Increasing All Accounts: an increase in an account is recorded on the same side
that the account appears in the accounting equation.
To record increases in asset accounts: an increase in an asset account is recorded on the
debit side because assets appear on the left side of the beginning accounting equation.
In the language of accounting, recording an amount on the left side is known as debiting
the account.
To record increases in liability accounts: an increase in a liability account is recorded on
the credit side because liabilities appear on the right hand side of the beginning
accounting equation.
In the language of accounting, recording an amount on the right side is known as
crediting the account.
Rule for Decreasing All Accounts: a decrease in an account is recorded on the side
opposite to that on which the account appears in the beginning accounting equation.
To record decreases in asset accounts: a decrease in asset accounts is recorded on the
opposite side where the account is placed in the beginning accounting equation.
Therefore, use the credit side to record decreases in all asset accounts.
+
Cash
(Debit side)
(Credit side)
800
Decrease
Increase
Accounting 10
-
8
Lesson 4
To record decreases in liability accounts: a decrease in liability accounts is recorded on
the opposite side where the account is placed in the beginning accounting equation.
Therefore, use the debit side to record decreases in all liability accounts.
-
Accounts Payable +
(Debit side)
100
Decrease
(Credit side)
Increase
Rule for Showing a Normal Balance in an Account: the balance of an account will
normally appear on the same side where it is shown in the beginning accounting
equation.
The difference between the total debits and the total credits is called the account balance.
+
10 000
2 000
12 000
Cash
800
200
1 000
-
- Accounts Payable +
100
400
$300 credit balance
$11 000
debit
balance
You should know and understand thoroughly the basic rules for increasing and decreasing
assets and liabilities shown on page 84 in the textbook.
Accounting 10
9
Lesson 4
Illustrating Asset and Liability Changes in T-Accounts
For the October transactions for Stacom Travel, the opening balances are recorded
in T-accounts.
Transaction 1: October 1 - Stacom Travel receives a cheque for $1 000 from Lee Baines in
payment of his debt owing to the business.
Debit entry:
What Happens: The asset Cash increases by $1 000 in the accounting equation.
Accounting Rule: To increase an asset, debit the account. Reason: Assets increase on the
side where they appear in the accounting equation--the debit side.
Accounting Entry: Debit: Cash, $1 000
Credit entry:
What Happens: The asset Accts. Rec./Lee Baines decreases by $1 000 in the accounting
equation.
Accounting Rule: To decrease an asset, credit the account. Reason: Assets decrease on
the opposite side where they appear in the accounting equation--the credit side.
Accounting Entry: Credit: Accts. Rec./Lee Baines, $1 000
+
Cash
Dr. (Left)
19__
Sept. 30 28 000
Oct. 1
1 000
Accounting 10
Cr. (Right)
- Accounts Receivable +
Dr. (Left)
Cr. (Right)
19__
19__
Sept. 30 1 000
Oct. 1
Ø
10
1 000
Lesson 4
Analysis: Two asset accounts are affected. The Cash account must be increased, so the
amount must be recorded on the debit side.
Since Baines has mailed a cheque to eliminate his debt to Stacom Travel, his asset
account must be decreased. Following the rule of decreasing all accounts, the dollar
amount of the cheque must be recorded on the credit side of Baines' accounts receivable
account.
Transaction 2: October 2 - Stacom Travel purchases furniture for $1 000 cash.
Debit entry:
What Happens: The asset Furniture increases in the accounting equation by
$1 000.
Accounting Rule: To increase an asset, debit the account. Assets are increased on the
same side where they appear in the accounting equation.
Accounting Entry: Debit: Furniture, $1 000
Credit entry:
What Happens: The asset Cash decreases by $1 000 in the accounting equation.
Accounting Rule: To decrease an asset, credit the account. Assets are decreased on the
opposite side where they appear in the accounting equation.
Accounting 10
11
Lesson 4
Accounting Entry: Credit: Cash, $1 000
+
20__
Sept. 30
Oct. 2
Furniture
10 000
1 000
-
+
Cash
20__
Sept. 30 28 000
Oct. 1
1 000
+
Oct. 2 1 000
Analysis: Two asset accounts are affected by this transaction. Furniture is debited
because it is increased; cash is credited because it is decreased.
Transaction 3: October 3 - Stacom Travel buys additional equipment costing $1 400 from
Nelson Equipment Co. on 60 days' credit.
Debit entry:
What Happens: The asset Office Equipment increases in the accounting equation by
$1 400.
Accounting Rule: To increase an asset, debit the account. Assets always increase on the
same side where A (assets) appear in the accounting equation.
Accounting Entry: Debit: Office Equipment, $1 400
Credit entry:
What Happens: Liabilities increase by $1 400 in the accounting equation. Since Nelson
Equipment Co. is a new liability, an account must be set up for this creditor.
Accounting Rule: To increase a liability, credit the account. Liabilities always increase
on the same side where L (liabilities) appear in the accounting equation.
Accounting 10
12
Lesson 4
Accounting Entry: Credit: Accts. Pay./Nelson Equipment Co., $1 400
+ Office Equipment -
- Accts. Pay./Nelson Equip. Co. +
20__
Sept.30 11 000
Oct. 3
1 400
20__
Oct. 3
1 400
Analysis: Office Equipment is debited to record the increase as an asset.
Accts. Pay./Nelson Equipment Co. is credited to record the increase to a liability account.
Double Entry Principle: for every transaction, the debit entry must be equal to the credit
entry.
Transaction 4: October 4 - Stacom Travel returns one piece of office equipment costing
$400 to Nelson Equipment Co. because the equipment arrived in damaged condition. The
creditor has accepted the return of the damaged equipment.
Debit entry:
What Happens: The liability, Accts. Pay./Nelson Equipment Co. decreases in the
accounting equation by $400.
Accounting Rule: To decrease a liability, debit the account. All liabilities decrease on the
opposite side where L appears in the accounting equation.
Accounting Entry: Debit: Accts. Pay./Nelson Equipment Co., $400
Accounting 10
13
Lesson 4
Credit entry:
What Happens: The asset Office Equipment decreases in the accounting equation by
$400.
Accounting Rule: To decrease an asset, credit the account. All assets decrease on the
opposite side where A appears in the accounting equation.
Accounting Entry: Credit: Office Equipment, $400
- Accts. Pay./Nelson Equip. Co.+
20__
Oct. 4
400
+
Office Equipment
20__
Sept. 30 11 000
Oct. 3 1 400
Oct. 3 1 400
_
20__
Oct. 4 400
Analysis: The liability, Accts. Pay./Nelson Equipment Co., is decreased; therefore it is
debited. The asset, Office Equipment, is decreased; therefore, it is credited.
Transaction 5: October 5 - Stacom Travel writes a cheque for $4 000 to Office
Equipment Co., an account payable.
Debit entry:
What Happens: The liability Accts. Pay./ Office Equipment Co. decreases by
$4 000 in the accounting equation.
Accounting Rule: To decrease an asset, credit the account. All assets decrease on the
opposite side where A appears in the accounting equation.
Accounting Entry: Debit: Accts. Pay./Office Equipment Co., $4 000
Accounting 10
14
Lesson 4
Credit entry:
What Happens: the asset Cash decreases by $4 000 in the accounting equation.
Accounting Rule: To decrease an asset, credit the account. All assets decrease on the
opposite side where A appears in the accounting equation.
Accounting Entry: Credit: Cash, $4 000
Accts. Payable/
- Office Equipment Co.
20__
Oct. 5
4 000
+
+
20__
Sept. 30 4 000
Cash
-
20__
Sept. 30 28 000
Oct. 1
1 400
20__
Oct. 2 1 000
Oct. 5 4 000
Analysis: The liability, Accts. Pay./Office Equipment Co., is decreased; therefore, it is
debited. The asset, Cash, is decreased; therefore, it is credited.
Here are four basic rules that will help you to analyze business transactions:
1.
Each transaction affects at least two accounts.
2.
If only two accounts are affected by a transaction, the debit entry in one account
must be equal to the credit entry in the other account.
3.
If more than two accounts are affected by a transaction, the total debits must equal
the total credits.
4.
The debit part of an entry always comes before the credit part.
Accounting 10
15
Lesson 4
Remember These Important Points
•
Since asset accounts are found on the left (debit) side of the
accounting equation, an increase to any asset must be recorded by
placing the dollar amount on the debit (left) side of the asset account.
Any decrease to an asset account must be recorded on the opposite side--the credit
side of the asset account.
•
Since liability accounts are found on the right (credit) side of the accounting
equation, an increase to any liability must be recorded by placing the dollar amount
on the credit (right) side of the liability account.
Any decrease to a liability account must be recorded on the opposite side--the
debit side of the liability account.
•
The difference between debits and credits in any account will result in an amount
called the account balance.
•
The balance of an account will normally appear on the same side where it is shown
in the accounting equation.
Thus, the normal balance of an asset account will show a debit balance.
The normal balance of a liability account will show a credit balance.
•
Every business transaction will have at least one debit entry and one credit entry.
•
Debits must always equal credits for every business transaction.
Accounting 10
16
Lesson 4
Do You Understand?
Account - a device for recording the effects of transactions under one title.
Debit - the left side of an account.
Credit - the right side of an account.
Ledger - a file or group of accounts.
Debiting - recording an amount on the left side.
Crediting - recording an amount on the right side.
Account Balance - the difference between the total debits and the total credits.
Double-Entry System - for every transaction, the debit entry or entries must equal the
credit entry or entries.
Conclusion
You learned how to increase and decrease asset and liability accounts. Normal balances
were also determined. A very important concept--Double-Entry Accounting--cannot be
stressed enough!
Self Test
1.
P 3-2, page 79 of the text
The required balance sheet from P 2-3 follows on page 126.
2.
MC 3-1, page 80 of the text
3.
P 3-4, page 90 of the text
Accounting 10
17
Lesson 4
P 3-2a • T-Account Ledger for Radio Station CHJK
Accounting 10
18
Lesson 4
P 3-2b
Radio Station CHJK
Accounting 10
19
Lesson 4
P 3-4a
Cash
5 000
200
300
Accts. Rec./Forrester
700
1 800
500
600
100
Balance _____________
Dr or Cr ____________
200
Balance_________________
Dr or Cr _______________
Accts. Payable
Chayka Corp.
Equipment
1 200
000
1 800
300
Balance _____________
Dr or Cr ____________
200
500
1 200
Supplies
700
200
Balance______________
Dr or Cr_____________
Dale Green, Capital
100
5
600
Balance_________________
Dr or Cr _______________
Balance______________
Dr or Cr_____________
Key Figure to Check: Cash balance is $1 800 debit.
P 3-4b
Proof of Accounting Equation:
Assets $______________ = Liabilities $_____________ + Owner's Equity $_______________
Accounting 10
20
Lesson 4
Answers to Self Test
P 3-2a • T-Account Ledger for Radio Station CHJK
Cash
Land
20__
Nov. 30 20 300
20__
Nov. 30 43 000
Building
Transmitter
20__
Nov. 30 68 000
20__
Nov. 30 55 000
Broadcast Equipment
Compact Disc Library
20__
Nov. 30 2 825
20__
Nov. 30
Accounts Payable
Dwelling Development
Bank Loan Payable
20__
Nov. 30 30 000
20__
Nov. 30 40 000
Accounts Payable
Ferris Music Centre
20__
Nov. 30
5 500
Accounts Payable
Radio Specialty Ltd.
20__
Nov. 30 39 500
5 125
E. Greenwood, Capital
20__
Nov. 30 80 000
Accounting 10
21
Lesson 4
P 3-2b
Radio Station CHJK
Summary of Ledger Account Balances
as at November 30, 20__
Total Debit (Left) Balances
Cash ............................ $20 300
Transmitter .................. 55 000
Broadcast Equipment .... 2 825
Compact Disk Library .... 5 500
Building ........................ 68 000
Land .............................. 43 000
Total Credit (Right) Balances
Bank Loan Payable................................ $30 000
Accts.Pay./Dwelling Development .......... 40 000
Accts.Pay./Ferris Music Centre ................. 5 125
Accts.Pay./Radio Specialty Ltd. .............. 39 500
E. Greenwood, Capital ............................. 80 000
Total Debits .............. $194 625
Total Credits ........................................ $194 625
Total Assets .............. $194 625
Total Liabilities + Owner's Equity...... $194 625
P 2-3c
Radio Station CHJK
Balance Sheet
as at November 30, 20__
Assets
Cash .................................$20 300
Transmitter .......................55 000
Broadcast Equipment .........2 825
Compact Disk Library .........5 500
Building .............................68 000
Land ...................................43 000
Liabilities
Bank Loan Payable .......................... $30 000
Accounts Payable:
Dwelling Dev. .............. $40 000
Ferris Music Centre......... 5 125
Radio Specialty Ltd. ...... 39 500 ........ 84 625
Total Liabilities............................ $114 625
________
Total Assets ...................$194 625
Owner's Equity
E. Greenwood, Capital ..................... 80 000
Total Liabilities + Owner's Equity . $194 625
Accounting 10
22
Lesson 4
MC 3-1a
No. Julian understands that the term debit means left and that the term credit means
right. But, he is applying the terminology incorrectly. Using the rule that he has stated,
Julian will not be successful in recording business transactions at least half of the time.
MC 3-1b
The term debit in accounting means left or an entry placed on the left side of an account.
The term credit in accounting means right or an entry placed on the right side of an
account.
MC 3-1c
A transaction that will work for Julian would be as follows: The firm bought office
supplies on account. The entry for this transaction would be debit Office Supplies and
credit Accounts Payable.
MC 3-1d
A transaction that will not work for Julian would be as follows: Suppose the firm paid an
outstanding liability in full by cheque. The entry for this transaction would be debit
Accounts Payable and credit Cash.
Accounting 10
23
Lesson 4
P 3-4a
Cash
5 000
200
300
Accts. Rec./Forrester
700
1 800
500
200
Supplies
200
700
200
600
100
Balance 1800
Dr or Cr Debit
Equipment
1 200
1 800
Balance 0
Dr or Cr Nil
Balance 500
Dr or Cr Debit
Accts. Payable
Chayka Corp.
Dale Green, Capital
500
600
Balance 3 000
Dr or Cr Debit
1 200
Balance 100
Dr or Cr Credit
100 5 000
300
Balance 5 200
Dr or Cr Credit
Proof of Accounting Equation:
A
=
$5 300 =
Accounting 10
L
+
OE
$100
+
$5 200
24
Lesson 4