Chapter 2
T Accounts, Debits, and
Credits, Trial Balance,
and Financial Statements
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
2–1
© 2011 Cengage Learning
LEARNING OBJECTIVES
After
this
chapter, this
you chapter,
should be
able
Afterstudying
you have
completed
you
willto:
be
able to do the following:
1
Determine balances of T accounts having
entries recorded on both sides of the
account.
2
Present the fundamental accounting
equation using the T account form, and
label the plus and minus sides.
3
Present the fundamental accounting
equation using the T account form, and
label the debit and credit sides.
(continued)
2–2
After you have completed this chapter, you will be
able to do the following:
4
Record directly in T accounts a group of
business transactions involving changes in
asset, liability, owner’s equity, revenue, and
expense accounts for a service business.
5
Prepare a trial balance.
6
Prepare (a) an income statement, (b) a
statement of owner’s equity, and (c) a
balance sheet.
7
Recognize the effect of transpositions and
slides on the account balance.
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Learning Objective 1
Determine balances
of T accounts
having entries
recorded on both
sides of the
accounts.
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The T-Account Form
(continued)
2–5
The T-Account Form
Normally, the footing
on the increase
(plus) side of an
account will be
larger than the
footing
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How to Determine Balances
of T Accounts
Step 1. Add each side separately and record
the totals (called footing).
Step 2. Subtract the large footing number
form the small footing number.
Step 3. Record the balance on the large
footing side.
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The T Account Form
Title
The T account
has a title (such
as Cash).
(continued)
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The T Account Form
Cash
+
Assets
(Cash, for
example)
increase on
the left side.
(continued)
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The T Account Form
Cash
+
–
Assets, Cash
in this
example,
decrease on
the right side.
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Owner’s Equity
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Expanded Fundamental
Accounting Equation
Assets = Liabilities +
Owner’s Equity
Capital ‒ Drawing + Revenue ‒ Expenses
Or, expanded out to include them as separate
headings—
Assets = Liabilities + Capital ‒ Drawing + Revenue ‒ Expenses
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PRACTICE EXERCISE 1
2–13
PRACTICE EXERCISE 1 SOLUTION
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Learning Objective 2
Present the
fundamental
accounting equation
using the T account
form, and label the
plus and minus sides.
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Restated Fundamental
Accounting Equation
Assets increase on the __________
left
side.
Liabilities increase on the __________
right
side.
Owner’s equity increases on the __________
right
side.
Revenue increases on the __________
side.
right
Expenses increase on the __________
side.
left
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PRACTICE EXERCISE 2
Using the fundamental accounting equation in T account form, label each side
with plus and minus.
PRACTICE EXERCISE 2 SOLUTION
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Learning Objective 3
Present the
fundamental
accounting equation
using the T account
form, and label the
debit and credit sides.
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Debit and Credit
 What does debit
mean?
– Forget what you know
about debit cards!
 What does credit
mean?
– Forget what you know
about credit cards!
 Debit means “left.”
 Credit means “right.”
 Debit is abbreviated
“DR.”
 Credit is abbreviated
“CR.”
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The T Account with
Debits and Credits
Title
Debit
The left side of
the account is
called the debit
side.
(continued)
2–20
The T Account with
Debits and Credits
Title
Debit
The left side of
the account is
called the debit
side.
Credit
The right side of
the account is
called the credit
side.
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Fundamental Accounting Equation
using Debits and Credits
Capital
–
+
Debit Credit
Amounts invested
(continued)
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Fundamental Accounting Equation
using Debits and Credits
Drawing
+
–
Debit Credit
Amounts
withdrawn
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The Capital Account Concept
Capital
–
+
Debit
Credit
Drawing
+
–
Debit Credit
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The critical rule to
remember is that the
amount placed on the
debit side of one or
more accounts MUST
equal the amount
placed on the credit
side of another
account or accounts.
(continued)
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The + or – changes
with the type of
account.
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PRACTICE EXERCISE 3
Using the fundamental accounting equation in T account form, label each side
as debit and credit.
PRACTICE EXERCISE 3 SOLUTION
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Learning Objective 4
Record directly in T
accounts a group of
business transactions
involving changes in asset,
liability, owner’s equity,
revenue, and expense
accounts for a service
business.
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Steps in Analyzing a Transaction
Step 1. Decide which accounts are involved.
Step 2. Classify the accounts involved (asset,
liability, capital, revenue, expense).
Step 3. Decide if the accounts involved are
increased or decreased.
Step 4. Write the transaction as a debit to one
account (or accounts) and a credit to
another account (or accounts).
Step 5. Check to see if the equation is in
balance after the transaction has been
recorded.
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Analyzing Transaction (a)
Transaction (a): Connor deposited $90,000 in
a bank account in the name of the business.
Step 1. Decide which accounts are involved.
The two accounts involved are Cash and
J. Conner, Capital.
Step 2. Classify the accounts involved.
Cash is an asset and J. Conner, Capital,
is an owner’s equity account.
(continued)
2–30
Step 3. Decide if the accounts involved are
increased or decreased.
Cash is being deposited in the bank
account, an increase to Cash. The owner
has invested that cash in the business and
has increased J. Conner, Capital.
Step 4. Write the transaction as a debit to one
account (or accounts) and a credit to
another account (or accounts).
Since Cash is an asset and is increased,
so Cash is debited. J. Conner, Capital is
an owner’s equity account and increased
by a credit.
(continued)
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Step 5. Check to see if the equation is in
balance.
There is at least one account debited
and at least one account credited, and
the total amount(s) debited equal the
total amount(s) credited . You now have
a debit equal to a credit, $ 90,000 debit
to Cash and a $90,000 credit to J.
Conner, Capital.
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Resulting Transaction (a)
in T Account Form
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Transaction (b): Conner’s Whitewater Adventures
bought equipment, paying cash, $38,000.
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Transaction (c): Conner’s Whitewater Adventures
bought equipment on account from Signal
Products, $4,320.
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Transaction (d): Conner’s Whitewater Adventures
paid Signal Products, a creditor, $2,000.
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Transaction (e): Conner invests her personal
computer in the business with fair market value of
$5,200.
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Summary―
Transactions (a) – (e)
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Let’s pause to see if the debits are equal to the
credits by listing the balances of the accounts.
Equal
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Transaction (f): Conner’s Whitewater Adventures
sold rafting tours for cash, $8,000.
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Transaction (g): Conner’s Whitewater Adventures
paid rent for the month, $1,250.
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Transaction (h): Conner’s Whitewater Adventures
bought computer paper, ink cartridges, invoice
pads, pens and pencils, folders, filing cabinets,
and 10-key calculators on account, $675.
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Transaction (i): Conner’s Whitewater Adventures
bought a three-month liability insurance policy,
$1,875.
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Transaction (j): Conner’s Whitewater Adventures
received a bill for newspaper advertisement from
the Times, $620.
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Transaction (k): Conner’s Whitewater Adventures
signs a contract with Crystal River Lodge to
provide rafting adventures for guests. Conner’s
Whitewater Adventures provides 27 one-day
rafting tours and bills Crystal River Lodge for
$6,750.
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Transaction (l): Conner’s Whitewater Adventures
pays on account to Signal Products, $1,500.
2–46
Transaction (m): Conner’s Whitewater
Adventures received and paid Solar Power, Inc.
for the electric bill, $225.
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Transaction (n): Conner’s Whitewater Adventures
paid on account to the Times, $620.
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Transaction (o): Conner’s Whitewater Adventures
paid the wages of a part-time employee, $2,360.
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Transaction (p): Conner’s Whitewater Adventures
bought additional equipment from Signal
Products, $3,780, paying $1,850 in cash and
placing the balance on account.
2–50
Transaction (q): Conner’s Whitewater Adventures
received $2,500 cash from Crystal River Lodge to
apply against the amount billed in transaction (k).
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Transaction (r): Conner’s Whitewater Adventures
sold tours for cash, $8,570.
2–52
Transaction (s): J. Conner withdrew cash for her
personal use, $3,500.
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Summary of Transactions
(continued)
2–54
Summary of Transactions
2–55
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PRACTICE EXERCISE 4
Record the following transactions directly into the appropriate T
accounts.
a. J. Molson deposited $90,000 in the name of the business.
b. Bought equipment for cash, $38,000.
c. Bought equipment on account, $4,320.
d. Paid $2,00 on account.
e. J. Molson invested his personal equipment, valued at $5,200
in the business.
f. J. Molson withdrew $1,200 from the business for personal
use.
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PRACTICE EXERCISE 4 SOLUTION
2–58
2–5
Learning Objective 5
Prepare a trial balance.
2–59
Prepare a Trial Balance
 List the account balances in two columns.
– Left column = Debits
– Right column = Credits
 List the accounts in the same order as the chart of
accounts.
– First the balance sheet accounts
– Then the income statement accounts
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2–61
The Trial Balance
 Is not a financial statement
 Does not contain dollar signs
 Uses a single underline under the list of
figures to be added
 Uses a double underline under column
totals
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PRACTICE EXERCISE 5
2–63
PRACTICE EXERCISE 5 SOLUTION
2–64
Learning Objective 6a
Prepare an income
statement.
2–65
The Income Statement
 The income statement shows total revenue
minus total expenses, which yields the net
income or net loss.
 The income statement reports how the
business has performed over a period of
time, usually a month or a year.
 When total revenue exceeds total expenses
over the period, the result is a net income
or profit.
2–66
2–67
Learning Objective 6b
Prepare a statement of
owner’s equity.
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The Statement of
Owner’s Equity
 The statement of owner’s equity shows
how—and why—the owner’s equity or
Capital account has changed over a stated
period of time.
 This statement is prepared after the
accountant has determined the net income
or net loss on the income statement.
2–69
2–70
The Net Income Figure
Use the net income
figure on the
income statement
to complete the
statement of
owner’s equity.
2–71
Learning Objective 6c
Prepare a balance sheet.
2–72
The Balance Sheet
 The balance sheet shows the financial
condition of a business’s assets offset by
claims against them as of a particular date.
 The balance sheet summarizes the
balances of the asset, liability, and owner’s
equity accounts on a given date (usually the
end of a month or year).
 It is a “snapshot” of the financial condition of
the business at that particular time.
2–73
2–74
Errors Exposed by the
Trial Balance
If the debit and credit columns in the trial balance
are not equal, then it is evident that there is an
error. Possible mistakes include—
 Making errors in arithmetic.
 Recording only half an entry.
 Recording both halves of the entry on the same
side.
 Recording one or more amounts incorrectly.
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Procedure for Locating Errors
The best method of locating errors is to do
everything in reverse, as follows:
 Look at the pattern of the balances to see if a
normal balance was placed in the wrong column
of the trial balance.
 Re-add the trial balance columns.
 Check the transferring of the figures from the
accounts to the trial balance.
 Verify the footings and balances of the accounts.
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PRACTICE EXERCISE 6
Use the trial balance in Practice Exercise 5 to prepare (a) an
income statement, (b) a statement of owner’s equity, and (c) a
balance sheet. Assume Collins Backpack Adventures started
business on July 1, 20—.
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PRACTICE EXERCISE 6 SOLUTION
(continued)
2–78
(continued)
2–79
2–80
Learning Objective 7
Recognize the effect of
transpositions and slides
on account balances.
2–81
Transpositions and Slides
 A transposition means that the digits have
been transposed, or switched around when
the numbers were copied from one place to
another, e.g. writing 619 for 916 (the
difference of 297 is evenly divisible by 9).
 A slide is an error in placing the decimal point;
in other words, a slide in the decimal point,
e.g., writing 2,700 for 27,000 (the difference of
24,300 is evenly divisible by 9).
(continued)
2–82
Transpositions and Slides
 An error may be a combination of a
transposition and a slide, e.g., writing $54 for
$450 (the difference of $396 is evenly divisible
by 9).
2–83
PRACTICE EXERCISE 7
Identify the following errors as transpositions or slides, and
indicate the amount of difference and whether it is divisible by 9.
a. The amount of supplies bought totaled $341, but it was
written as $431.
b. Equipment was purchased for $3,500, but it was written as
$35,000.
c. An error was made in the trial balance because $35 was
written for $530.
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PRACTICE EXERCISE 7 SOLUTION
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THE END
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