Chapter 2-1
Using T Accounts
ANALYZING THE ACCOUNTING
EQUATION
2-1
page 28
2
Analyzing Transactions in Debit and
Credit Parts
• It is important to distinguish between
debit and credit parts.
• These two terms will be used
throughout the study of accounting.
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Accounting Equation
• Assets
Left Side
= Liabilities + Owner’s Equity
Right Side
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New Vocabulary: T-account
• An accounting device used to analyze transactions.
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Debit
• An amount recorded on the left side of a T account.
Left Side
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Credit
• An amount recorded on the right side of a T
account.
Right Side
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Normal Balance
• The side of the account that is increased.
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Using T Accounts
• Assets
= Liabilities + Owner’s Equity
T account
Left Side
Debit Side
Right Side
Credit Side
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Account Balances
• Assets
Any Asset
Debit
=
Liabilities + Owner’s Equity
Credit
Normal Bal.
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Account Balances
• Assets
=
Liabilities + Owner’s Equity
Any Liability
Debit
Credit
Normal Balance
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Account Balances
• Assets
= Liabilities + Owner’s Equity
Owner’s Capital Account
Debit
Credit
Normal Bal.
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Account Balances
• Assets
Any Asset
Debit
= Liabilities + Owner’s Equity
Any Liability
Credit
Debit
Normal Bal.
Credit
Normal Balance
Debit
Owner’s Capital Account
Credit
Normal Bal.
• Remember: An equation must always have equal
amounts on each side.
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Increases and Decreases
• Assets
=
Any Asset
Debit
Liabilities + Owner’s Equity
Any Liability
Credit
Debit
Normal Bal.
Credit
Normal Balance
Debit
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Owner’s Capital Account
Credit
Normal Bal.
14
Increases and Decreases
Remember:
• The two sides of an account are used to record
increases and decreases to that account.
• Some accounts increase on the debit side
• Some accounts increase on the credit side.
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Increases and Decreases
• The easy way to remember the
increase side of each account is to
connect it with the normal balance
side of the account.
• The decrease side is the opposite side.
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Draw a T account for Assets
• Please add the increase arrow.
Assets
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Draw a T account for Assets
• How did you do?
Assets
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Draw a T account for Liabilities
• Please add the increase arrow.
Liabilities
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Draw a T account for Liabilities
• How did you do?
Liabilities
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Draw a T account for Owner’s Equity
• Please add the increase arrow.
Capital
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Draw a T account for Owner’s Equity
• How did you do?
Capital
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Which is the Normal Balance Side?
•
•
•
•
•
•
Assets?
Left Side (Debit Side)
Liabilities?
Right Side (Credit Side)
Owner’s Equity?
Right Side (Credit side)
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ACCOUNTS--Review
page 29
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ACCOUNT BALANCES--Review
page 29
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Work Together 2-1
On my webpage
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Chapter 2-2 Analyzing How Transactions
Affect Accounts
• Each transaction affects the balances of at least two
accounts.
• Chart of Accounts: A list of accounts used by a
business.
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Analyzing Transactions
• Assets
Cash
Debit
= Liabilities + Owner’s Equity
Any Liability
Credit
Debit
Normal Bal.
Credit
Normal Balance
Debit
Owner’s Capital Account
Credit
Normal Bal.
• Remember: An equation must always have equal
amounts on each side.
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Analyzing Transactions
•
•
1.
2.
3.
4.
Received $1,000 cash from owner, Kyle June, as
an investment.
Consider:
Which accounts are affected?
How is each account classified?
How is each classification changed?
How is each amount entered in the accounts?
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Analyzing Transactions
• Received $5,000 cash from owner as an investment.
Assets
= Liabilities + Owner’s Equity
Cash
Debit
Kyle June, Capital
Credit
Debit
Credit
N. Bal.
Normal Balance
$5,000
$5,000
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Analyzing Transactions
• Paid cash for supplies, $275.00.
Assets
Cash
Debit
= L + OE
Supplies
Credit
Debit
N. Bal
Credit
N. Bal
$275.00
$275.00
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Analyzing Transactions -- Use the four
questions.
• Paid $1,200 for insurance.
Assets
Cash
Debit
= L + OE
Prepaid Ins.
Credit
N. Bal
1,200.00
Debit
Credit
N. Bal
1,200.00
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Analyzing Transactions
Bought supplies on account from Stutzman Music. $800.00.
Assets
= Liabilities + Owner’s Equity
Supplies
Debit
A.P. - Stutzman Music
Credit
Debit
N. Bal
800.00
Credit
Normal Bal.
800.00
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Analyzing Transactions
• Paid $200.00 on account to Stutzman Music.
= Liabilities + Owner’s Equity
Assets
Cash
Debit
A.P. - Stutzman Music
Credit
Debit
N. Bal
Credit
Normal Bal.
200.00
200.00
• Remember the increase and decrease side of each account can be
related back to the accounting equation.
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RECEIVED CASH FROM OWNER AS AN
INVESTMENT
page 32
August 1. Received cash from owner as an investment, $5,000.00.
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PAID CASH FOR SUPPLIES
page 33
August 3. Paid cash for supplies, $275.00.
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PAID CASH FOR INSURANCE
page 34
August 4. Paid cash for insurance, $1,200.00.
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BOUGHT SUPPLIES ON ACCOUNT
page 35
August 7. Bought supplies on account from Supply Depot, $500.00.
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PAID CASH ON ACCOUNT
page 36
August 11. Paid cash on account to Supply Depot, $300.00.
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Audit Your Understanding
Which two accounts are affected when a business pays cash
for supplies?
• Cash
• Supplies
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Work Together 2-2
On My Website
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Chapter 2-3
Analyzing How Transactions
Affect Owner’s Equity Accounts
RECEIVED CASH FROM SALES
page 38
August 12. Received cash from sales, $295.00.
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SOLD SERVICES ON ACCOUNT
page 39
August 12. Sold services on account to Oakdale School, $350.00.
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Analyzing Transactions 2-3
• Received cash from sales, $400.00
• Revenue makes Owner’s Equity increase.
= Liabilities + Owner’s Equity
Sales
Assets
Cash
Debit
Credit
Debit
Credit
N. Bal
Normal Bal.
400.00
400.00
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Analyzing Transactions
• Sold services on account to Kids Time, $500.00
Assets
= Liabilities + Owner’s Equity
A.R. Kids Time
Debit
Sales
Credit
Debit
Credit
N. Bal
Normal Bal.
500.00
500.00
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Analyzing Transactions --Use the four
questions.
• Received cash on account from Kids Time,
$100.00
Assets
= L + OE
Cash
Debit
N. Bal
$100.00
A.R. Kids Time
Credit
Debit
Credit
N. Bal
$100.00
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Analyzing Expense Transactions
• Expenses decrease owner’s equity.
• The decreases from expenses could be recorded directly
in the Owner’s Equity account.
• But, the OE account would have too many entries.
• Using separate accounts for each helps to keep
information straight.
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Analyzing Expense Transactions
• The owner’s capital account has a normal credit balance.
• Decreases in the owner’s capital account are shown as
debits.
• Therefore, an expense account has a
normal debit balance.
• Expenses are always debited.
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PAID CASH FOR AN EXPENSE
page 40
August 12. Paid cash for rent, $300.00.
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Analyzing Transactions
• Paid cash for rent, $800.00.
• Expenses decrease Owner’s Equity--so an expense account’s
normal balance side is the left side.
= Liabilities + Owner’s Equity
Assets
Cash
Debit
Rent Expense
Credit
Debit
N. Bal
Credit
Normal Bal.
800.00
800.00
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Owner’s Taxable Income
A business owned by one person is called a proprietorship.
• The IRS does not require the proprietorship, itself, to pay
taxes.
• However, the owner must include the net income of the
proprietorship in his or her own taxable income.
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Owner Withdrawals
• Employee salaries are considered an expense that
reduces the net income of a company.
• Owner withdrawals are not considered an expense.
• Withdrawals do not affect the business’s income.
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PAID CASH TO OWNER
FOR PERSONAL USE
page 42
August 12. Paid cash to owner for personal use, $125.00.
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Analyzing Transactions
• Paid cash to owner for personal use, 600.00.
• Withdrawals decrease Owner’s Equity--so a drawing account’s normal
balance is the left side.
= Liab. + Owner’s Equity
Assets
Cash
Debit
Taylor Stalter, Drawing
Credit
Debit
600.00
Normal Bal.
600.00
N. Bal
Credit
• Withdrawals could be recorded directly in the owner’s capital
account. Using a separate Drawing account helps keep information
separate.
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Audit Your Understanding
What two accounts are affected when a business receives
cash from sales?
• Cash and Sales
What two accounts are affected when services are sold on
account.
• Sales and Accounts Receivable
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Audit Your Understanding
What two accounts are affected when a business pays
cash to the owner for personal use?
• Owner’s drawing account and Cash
Are revenue accounts increased on the debit side or
credit side? Explain why.
• Credit side because sales increase owner’s equity
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Audit Your Understanding
Are expense accounts increased on the debit side or credit
side. Explain why.
• Debit side because expenses decrease owner’s equity.
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Work Together, 3-3
On My Website
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