Accounting for a Service
Business
Unit 1.4
Balance Sheet Accounts
Accounts
The transaction analysis sheet introduced
in the last unit show how the balance
sheet changes as a result of daily
transactions
The use of this type of sheet is somewhat
impractical due to the volume of the
transactions
An Account is a separate set of changes
for each balance sheet item
The “T” Account
For every item on the balance sheet, a
separate account is used
As the name implies, the account template
is shaped like a “T”
Account Title
Left Side
Right Side
Debit
Credit
Debit and Credit
The right side of a account is called the
Debit side; and the left side is the Credit
“T” accounts are often used by
accountants as rough calculations when
analyzing transactions
As Assets are located on the left side of
the Balance Sheet; their opening balance
is listed as a debit on the respective
accounts
Balance Sheet Assets
Cash
6,325
Accounts Receivable
3,000
Supplies
555
Land
25,000
Debits and Credits (continued)
As Liabilities and Owner’s Equity accounts
are recorded on the right hand side of the
balance sheet, their balances are recorded
on the right side of a T account
Accounts Payable
4,680
R. Miller, Capital
92,800
Introducing Ledgers
A Ledger is a group of accounts
Each account has a separate heading
The ending balances of each account
make up the balance in the Ledger
These Ledger totals are then used to
produce a Balance Sheet
Opening the Ledger
 Place the account name in the middle of each
account
 Record the date and opening balance from the
balance sheet on the appropriate side in the
account
 Total debit balances must equal total credit
balances – known as having the ledger in
balance
Recording Transactions in Accounts
 Follow these steps in analyzing transactions and
recording them in accounts:
Determine which accounts change in value as a
result of the transaction (note: two or more
accounts will change in value
Identify the type of account that has changed. Is the
account an asset, a liability or an owner’s equity
account
Decide whether the change is an increase or a
decrease in the account
Decide whether the change is recorded as a debit
or credit in the account
Transaction Analysis
 Accounts increase on the same side as they appear
on the balance sheet and they decrease on the
opposite side
If assets increase, the amount is recorded on
the debit side
If assets decrease, the amount is recorded on
the credit side
If liabilities or owner’s equity increase the
amount is recorded on the credit side
If liabilities or owner’s equity decrease, the
amount is recorded on the debit side
Exercise to Try
Page 51, #1 and 3
Dominicana Restaurant
Calculating New Balances in the
Accounts
 The difference between the totals of the two sides of
an account is called the account balance
 The account balance is placed on the side of the
account with the highest total
 To determine the new account balance, the following
calculations are made for each account:
Add up the debit side of the account
Add up the credit side of the account
Subtract the smaller amount from the larger and
place the answer on the larger side of the
account. This is the new balance for the account
Preparing a Trial Balance
 A trial balance is prepared to verify that the total debits
are still equal to the total credits in the ledger
 The trial balance is a list of the ledger account
balances. The total of the debit balances should equal
the total of the credit balances. The trial balance
indicates the mathematical accuracy of the ledger
 Two columns are required – the first is used to record
the debit balances and the second column is used to
record the credit balances
 It is an informal statement compared to the balance
sheet which is considered a formal financial statement
Limitations of the Trial Balance
 It makes sure that the principle of double entry
accounting was followed – verifies that a debit
amount was recorded for each credit amount
 However, the trial balance does not indicate if
the wrong accounts were used to record a
transaction
Note: when the amount is placed on the
opposite side of the account the error double
the original amount
Preparing a New Balance Sheet
 A new Balance Sheet is prepared from the
information contained on the trial balance
 See Page 49 – Goldman’s Gym
GAAP – key ideas
Double entry accounting – the total of the debit
amounts must always equal the total of the credit
amounts
Assets – are located on the left side of the balance
sheet. Asset accounts increase on the debit side
and decrease on the credit side
Liabilities and Owner’s Equity – are located on the
right side of the balance sheet. Liability and owner’s
equity accounts increase on the credit side and
decrease on the debit side
Trial Balance - proves the mathematical accuracy
of the ledger. It does not indicate that transactions
were all correctly recorded as debits and credits