Analysis of Business Transactions
Chapter 3
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Learning Objectives
1. Explain the double-entry accounting
framework.
2. Describe the standard form of account.
3. Describe the T account.
4. Explain the rules of debit and credit as
applied to asset, liability, and owner’s
equity accounts.
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Learning Objectives
5. Explain the need for temporary owner’s
equity accounts.
6. Explain the rules of debit and credit as
applied to temporary owner’s equity
accounts.
7. Record business transactions in T
accounts and prepare a trial balance.
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Learning Objective 1
Explain the double-entry accounting framework
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Each business transaction has at least two effects,
both of which are recorded in the accounting
records.
Business transactions are NOT recorded twice.
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Separate records
 Called accounts

Needed to show increases and decreases in each
• Asset
• Liability
• Aspect of owner’s equity
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Learning Objective 2
Describe the standard form of account
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Accounts are the basic
storage units for
accounting data.
A separate account is
maintained for each
asset, liability, and
owner’s equity item.
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Three major parts
The account title and number
The left side, which is called the debit side
The right side, which is called the credit side
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Learning Objective 3
Describe the T account
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The left side is the debit side.
The right side is the credit side.
Debit means "left", and credit
means "right".
Whether an account is increased
or decreased by a debit or credit
depends on the type of account.
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Learning Objective 4
Explain the rules of debit and credit as applied
to asset, liability, and owner’s equity accounts
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Review Quiz 2-1
Do the terms debit and credit mean increase or
decrease, or may they mean either? Explain.
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Example
Susan Gilbert invests $5,000 in her candy and gift
business.
Let’s record the transaction in the appropriate T accounts.
Analyze the transaction and decide which T
accounts are affected.
Decide which account requires a debit and which
account requires a credit.
Cash, an asset account, is increasing and requires a
debit.
Susan Gilbert, Capital, an owner’s equity account, is
increasing and requires a credit.
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Example Answer
Susan Gilbert invests $5,000 in her candy and gift
business.
Let’s record the transaction in the appropriate T accounts.
Cash
Susan Gilbert, Capital
5,000
5,000
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Example
Susan Gilbert purchases equipment on account
costing $700.
Let’s record the transaction in the appropriate T accounts.
Analyze the transaction and decide which T accounts
are affected.
Decide which account requires a debit and which
account requires a credit.
Equipment, an asset account, is increasing and
requires a debit.
Accounts Payable, a liability account, is increasing and
requires a credit.
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Example Answer
Susan Gilbert purchases equipment on account
costing $700.
Let’s record the transaction in the appropriate T accounts.
Equipment
Accounts Payable
700
700
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Quick Check
The purchase of land on account
a. increases assets and decreases liabilities.
b. increases assets and increases owner’s equity.
c. increases liabilities and increases owner’s equity.
d. decreases assets and increases liabilities.
e. increases assets and increases liabilities.
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Review Quiz 2-2
Cash
(a) 8,000
(c) 500
Accounts Payable
(e) 600
(e) 600
Office Supplies
(d)
300
Greg Calloway, Capital
(c) 500
(a) 8,000
Shop Supplies
(d) 300
(b) 1,200
Equipment
(b) 1,200
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Learning Objective 5
Explain the need for temporary
owner’s equity accounts
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When the account period is over, the balances of
these temporary accounts are transferred to the
owner’s capital account.
Include
• Revenues
• Expenses
• Owner’s Drawing
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Learning Objective 6
Explain the rules of debit and credit as
applied to temporary owner’s equity accounts
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Revenue Accounts
Expense Accounts
Debit
Credit
Debit
Credit
-
+
+
-
Owner’s Drawing Account
Debit
Credit
+
-
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Example
Susan Gilbert performs $1,300 of services on account.
Let’s record the transaction in the appropriate T accounts.
Analyze the transaction and decide which T accounts
are affected.
Decide which account requires a debit and which
account requires a credit.
Accounts Receivable, an asset account, is increasing
and requires a debit.
Service Revenue, a revenue account, is increasing and
requires a credit.
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Example Answer
Susan Gilbert performs $1,300 of services on account.
Let’s record the transaction in the appropriate T accounts.
Accounts Receivable
Service Revenue
1,300
1,300
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Example
Susan Gilbert pays rent of $800 for the current month.
Let’s record the transaction in the appropriate T accounts.
Analyze the transaction and decide which T accounts
are affected.
Decide which account requires a debit and which
account requires a credit.
Rent Expense, an expense account, is increasing and
requires a debit.
Cash, an asset account, is decreasing and requires a
credit.
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Example Answer
Susan Gilbert pays rent of $800 for the current month.
Let’s record the transaction in the appropriate T accounts.
Cash
Rent Expense
800
800
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Example
Susan Gilbert withdraws $500 from the business for
personal use.
Let’s record the transaction in the appropriate T accounts.
Analyze the transaction and decide which T accounts
are affected.
Decide which account requires a debit and which
account requires a credit.
The Owner’s Drawing account , a temporary owner’s
equity account, is increased with a debit.
Cash, an asset account, is decreasing and requires a
credit.
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Example Answer
Susan Gilbert withdraws $500 from the business for
personal use.
Let’s record the transaction in the appropriate T accounts.
Susan Gilbert, Drawing
500
Cash
500
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Quick Check
The payment of utilities for the current month
a. increases assets and decreases liabilities.
b. increases assets and increases expenses.
c. increases liabilities and decreases expenses.
d. decreases assets and increases expenses.
e. increases owner’s equity and increases expenses.
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Review Quiz 2-3
Cash
(a)
Lynn Dowdy, Drawing
5,000 (b)
(c)
(d)
600
540
1,800
(e)
200
(f)
500
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(f) 500
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Review Quiz 2-3
Service Revenue
Salaries Expense
(a) 5,000
(d) 1,800
Rent Expense
(b) 600
Utilities Expense
Repairs Expense
(c) 540
(e) 200
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Learning Objective 7
Record business transactions in T
accounts and prepare a trial balance
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The balance of any account is the difference between
the account's
 Total debits
 Total credits
Balances are arrived at by
 Footing (adding) the debit and credit columns of
each account
 Calculating the difference between the two columns
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Example
The balance of the Cash account of Walker and
Associates is found as follows:
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A trial balance is prepared at the end of the accounting
period to ensure the total debits equal the total credits.
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The normal balance of any account is the increase side.
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Quick Check
The normal balance of Service Revenue is
a. a debit.
b. a credit.
c. impossible to determine without more information.
d. a debit or credit depending on management’s intent.
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Review Quiz 2-4
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Quick Check
Which group of accounts are increased with debits?
a. Assets and Liabilities
b. Liabilities and Owner’s Drawing account
c. Assets and Revenues
d. Revenues and Expenses
e. Assets and Expenses
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Review Quiz 2-5
Why do expense accounts and the owner’s drawing
account have debit balances?
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Focus on Ethics
Is it ethical to replace Board of Directors in a
corporation if they have not been charged with
any fraudulent activities?
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Joining the Pieces
Total Debits
=
Total Credits
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