Unit 3 * Recording Transactions in T-Accounts

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Unit 3 – Recording Transactions
in T-Accounts
Key Concepts
•
•
•
•
•
•
Balance sheet to T-account ledger
Analyze transactions using debits and credits
Record transactions in T-accounts
Calculate the balances in accounts
Trial balances
New balance sheet from Trial Balance
Accounts
• Transaction analysis sheet – impractical due to
the large number of financial events that
occur each day in business.
• More efficient method is to keep a separate
record of the changes for each item in a
balance sheet = Account
Ledger: is a group or file of accounts that can be
recorded on paper or via computer
T-Accounts
Account Title
Left Side
Debit
Right Side
Credit
- As transactions occur, (as in Unit 2) we will make the resulting changes to
the T-accounts that were affected by the transaction.
- T- Accounts are not needed in business but are often used by accountants
for their rough work when they analyze transactions.
Recording Balances in Accounts
•
there is a separate account for each asset and liability and for the owner’s equity.
Opening balance of an asset
Recorded on the left or debit side of its account
******************************************
Opening balance of liabilities and owner’s equity
Recorded on the credit or right side of their accounts.
Opening the Ledger
- You can visualize the balance sheet as a large “T”. Asset accounts normally have debit balances
(left side), while liability and owner’s equity accounts have credit balances. (right side)
Opening the Ledger
To open accounts in the ledger:
1) Place the account name in the middle of each account
2) Record the date and opening balance from the balance sheet on the appropriate side
in the account
Sep. 30
Sep. 30
Sep. 30
Sep. 30
Sep. 30
Sep. 30
Sep. 30
Sep. 30
Sep. 30
Double-Entry Accounting
• Requires a ….
Debit Amount = Credit Amount
for each transaction.
** Remember, the LHS must equal the RHS **
Here, this is known as having the ledger in balance.
Recording Transactions in Accounts
- Step 1: Determine which accounts change in
value as a result of the transaction.
** 2 or more accounts will change for each
transaction **
- Step 2: Identify the type of account that has
changed. (asset, liability, owner’s equity)
- Step 3: Is the change an increase or decrease in
the account?
- Step 4: Is the change a debit or a credit in the
account? The Ledger must remain in balance.
Examples – Recording Transactions
• Go through 5 examples.
– Pages 41-44
Summary Rules – Adjusting Records as
a result of Transactions.
Types of Accounts
Increases
Decreases
Asset accounts
Debit
Credit
Liability and Owner’s Equity
accounts
Credit
Debit
** Please make sure your answer makes sense. Take some time
to think about it. In other words, I do not want you to simply
memorize the above table when you are doing these exercises.
Calculating New Balances in the
Accounts
1) Add up the debit side of the account.
2) Add up the credit side of the account.
3) Subtract the smaller amount from the larger
and place the answer on the larger side of the
account. This is the new account balance.
** The difference between the totals of the two
sides of an account is called the account balance.
New Account Balances…
Cash
Jul. 31
6 325
Aug. 5
705
Aug. 2
500
7
535
7
5 000
1 240
11 825
New Balance
10 585
11 825 – 1 240 = 10 585
(Debit total)
(Credit total)
New Account
Balance
New Account Balances…
Accounts Payable
Aug. 5
705
Jul. 31
4 680
Aug. 5
25
7
1 100
5 805
New Balance
5 805 – 705 = 5 100
(Credit total)
(Debit total)
5 100
New Account
Balance
Apply your knowledge!
Questions (1-2)
Preparing a Trial Balance
- is a list of all the accounts with their current balances.
(listed in the order that they appear in the ledger)
• Purpose: to check the accuracy of the ledger
- In other words, to double-check that…
($) Debit Balances = ($) Credit Balances
…after a series of transactions.
If they are equal, the ledger is said to be in balance. (if
not, it is out of balance)
- Trial balances are usually done at the end of each week
or month.
Trial Balances
• are used within a business…
• Therefore they are considered informal
statements, whereas balance sheets are
considered to be formal statements.
• Therefore, abbreviations are permitted.
Example
Trial
Balance
Another Example in
the textbook on pages
46-47.
Limitations of the Trial Balance
• the trial balance does not indicate if the
wrong accounts were used to record a
transaction.
– Reversing the debit and credit (example page 47)
– Trial balance will balance mathematically because
the errors offset each other.
– Trial balance can easily be transferred back to a
Summary Unit 3 - GAAP
• Double-entry accounting
– Total debits = Total credits (before and after
transactions)
• Assets
– Increase on the debit (left) side and decrease on the
credit (right) side.
• Liabilities and owner’s equity
– Increase on the credit (right) side and decrease on the
debit (left) side.
• A trial balance
– Proves mathematical accuracy of the ledger. It does
not indicate that transactions were all correctly
recorded as debits and credits.
Apply your knowledge!
Questions (3-10)
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