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3-1
Analyzing Business Transactions
Using T Accounts
Section 1: Transactions That Affect
Assets, Liabilities, and Owner’s Equity
Chapter
3
Section Objectives
1. Set up T accounts for assets, liabilities,
and owner’s equity.
2. Analyze business transactions and enter
them in the accounts.
3. Determine the balance of an account.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
3-3
The Accounting Equation
ASSETSThe property a
business owns
LIABILITIESThe debts of
the business
OWNER’S
EQUITYThe owner’s financial
interest in the business
=
+
3-4
Classification of Accounts
Asset Accounts
Asset accounts show the property a business
owns.
Liability Accounts
Liability accounts show the debts of the
business.
Owner’s Equity Accounts
Owner’s equity accounts show the owner’s
financial interest in the business.
3-5
= +
T Accounts
ASSETS
+
Record
Increases
LEFT SIDE
-
Record
Decreases
RIGHT SIDE
LIABILITIES
-
Record
Decreases
LEFT SIDE
+
Record
Increases
RIGHT SIDE
OWNER’S EQUITY
-
Record
Decreases
LEFT SIDE
+
Record
Increases
RIGHT SIDE
Set up T accounts for assets, liabilities
and owner’s equity.
Objective 1
3-6
Effects of Business Transactions
1. Analyze the financial event.
Steps to analyze the effects of the business
transactions:
2. Apply the left-right rules for each account affected.
3. Make the entry in T-account form.
Identify the accounts affected.
Classify the accounts affected.
Determine the amount of increase or decrease for each
account.
Objective 2 Analyze business transactions and enter
them in the accounts.
3-7
Initial Investment
LEFT Increases to asset accounts are recorded on the
left side of the T account.
RIGHT Increases to owner’s equity accounts are
recorded on the right side of the T account.
Jason Taylor withdrew $90,000 from personal
savings and deposited it in the new business
checking account for JT’s Consulting Services.
Cash Jason Taylor, Capital
(a) 90,000 (b) 90,000
3-8
Business Transaction
JT’s Consulting Services issued a $10,000 check to
purchase a computer and other equipment.
Analysis:
(c) The asset account, Equipment, is increased by $10,000.
(d) The asset account, Cash, is decreased by $10,000.
Equipment
(c) 10,000
Cash
(d) 10,000
3-9
Purchase of Equipment on Account
The firm bought office equipment for $12,000 on account
from Office Plus.
Analysis:
(e) The asset account, Equipment, is increased by $12,000.
(f) The liability account, Accounts Payable, is increased by $12,000.
Equipment Accounts Payable
(e) 12,000 (f) 12,000
3-10
Purchase of Supplies for Cash
JT’s Consulting Services issued a check for $3,000 to
Office Supplies Inc. to purchase office supplies.
Analysis:
(g) The asset account, Supplies, is increased by $3,000.
(h) The asset account, Cash, is decreased by $3,000.
Supplies
(g) 3,000
Cash
(h) 3,000
3-11
Payment of a Liability
JT’s Consulting Services issued a check in the amount
of $5,000 to Office Plus.
Analysis:
(i) The asset account, Cash, is decreased by $5,000.
(j) The liability account, Accounts Payable, is decreased by $5,000.
Accounts Payable
(j) 5,000
Cash
(i) 5,000
3-12
Prepayment of Rent
JT’s Consulting Services issued a check for $7,000 to
pay rent for the months of December and January.
Analysis:
(k) The asset account, Prepaid Rent, is increased by $7,000.
(l) The asset account, Cash, is decreased by $7,000.
Prepaid Rent
(k) 7,000
Cash
(l) 7,000
3-13
Determine the balance of an
accountObjective 3
An account balance is the difference between the
amounts recorded on the two sides of an account.
A footing is a small pencil figure written at the base of an
amount column showing the sum of the entries in the
column.
3-14
the total of those entries is the
account balance.
an account contains entries on only
one side,
that amount is the balance.an account shows only one amount,
the balance is recorded on the left
side.
the total on the left side is larger,
the balance is recorded on the right
side.
the total on the right side is larger
than the total on the left side,
Recording Account Balances
IF THEN
3-15
Computing the
Account Balance
Cash
(a) 90,000 (d) 10,000
(h) 3,000
(i) 5,000
(l) 7,000
-----------25,000 Footing
Bal. 65,000(90,000 – 25,000)
3-16
Account balances for Carter Consulting Services
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash Accounts Payable Jason Taylor, Capital
(a) 90,000 (d) 10,000 (j) 5,000 (f) 12,000 (b) 90,000
(h) 3,000 Bal. 7,000
(i) 5,000
(l) 7,000
Bal. 65,000 25,000
Supplies
SUMMARY OF ACCOUNT BALANCES
(g) 3,000
ASSETS = LIABILITIES + OWNER’S EQUITY
Prepaid Rent 65,000 7,000 90,000
3,000
(k) 7,000 7,000
22,000
Equipment
97,000 = 7,000 + 90,000
(c) 10,000
(e) 12,000
Bal. 22,000
Summary of Account Balances
Analyzing Business Transactions
Using T Accounts
Section 2: Transactions That Affect
Revenue, Expenses, and Withdrawals
Chapter
3
Section Objectives
4. Set up T accounts for revenue and expenses.
5. Prepare a trial balance from T accounts.
6. Prepare an income statement, a statement of owner’s equity, and a balance sheet.
7. Develop a chart of accounts.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
3-18
Owner’s Equity
Decrease
Side
Increase
Side
Revenue
Decrease
Side
Increase
Side
Revenues increase owner’s equity.
Increases in owner’s equity appear on the right side of
the T account.
Therefore, increases in revenue appear on the right side of revenue T accounts.
T-Account for Revenue
3-19
The right side of the revenue account shows
increases and the left side shows decreases.
Revenue
Decrease
Side
Increase
Side
Decreases in revenue accounts are rare but might
occur because of corrections or transfers.
3-20
Reviewing the Effects of the Transactions
Cash
Bal. 65,000
(m) 26,000
Fees Income
(n) 26,000
$26,000 (m) is entered on
the left (increase) side of
the asset account Cash.
$26,000 (n) is entered on
the right side of the Fees
Income account.
Set up T accounts for revenue
and expensesObjective 4
3-21
Recording Revenue from Services Sold
on Credit
In December JT’s Consulting Services earned
$9,000 from various charge accounts clients.
Analysis:
(o) The asset account, Accounts Receivable, is increased
by $9,000.
(p) The revenue account, Fees Income, is increased by
$9,000.
Accounts Receivable
(o) 9,000
Fees Income
(p) 9,000
3-22
Analysis:
(q) The asset account, Cash, is increased by $4,000.
(r) The asset account, Accounts Receivable, is decreased by
$4,000.
Receipt of Payments on Account
Charge account clients paid $4,000, reducing the
amount owed to JT’s Consulting Services.
Cash Accounts Receivable
(q) 4,000 (r) 4,000
3-23
Expenses decrease owner’s equity.
Owner’s Equity
Decrease
SideIncrease
Side
Revenue
Decrease
Side
Increase
Side
Expense
Increase
SideDecrease
Side
Decreases in owner’s equity appear on the left side of the
T accounts.
3-24
Payment of Salaries
In December JT’s Consulting Services paid $7,000 in
salaries.
Analysis:
(s) The asset account, Cash, is decreased by $7,000.
(t) The expense account, Salaries Expense, is increased by
$7,000.
Salaries Expense Cash
(t) 7,000 (s) 7,000
3-25
Payment of Utilities
JT’s Consulting Services issued a check for $500 to pay
the utilities bill.
Analysis:
(u) The asset account, Cash, is decreased by $500.
(v) The expense account, Utilities Expense, is increased by
$500.
Utilities Expense
(v) 500
Cash
(u) 500
3-26
Drawing decreases owner’s equity.
Owner’s Equity
Decrease Side Increase Side
Revenue
Decrease Side Increase Side
Expense
Increase Side Decrease Side
Drawing
Increase Side Decrease Side
Decreases in owner’s equity appear on the left side of the
T accounts.
Owner Withdrawals
3-27
Jason Taylor wrote a check to withdraw $4,000 cash for
personal use.
Analysis:
(w) The asset account, Cash, is decreased by $4,000.
(x) The owner’s equity account, Jason Taylor, Drawing, is
increased by $4,000.
The Owner Withdraws Funds
Jason Taylor, Drawing
(x) 4,000
Cash
(w) 4,000
3-28
The Rules of Debit and Credit• A debit is an entry on the left side of an
account.
• A credit is an entry on the right side of an
account.
• A double-entry system is an accounting
system that involves recording the effects of
each transaction as debits and credits.
• Every transaction in a Double entry
accounting system has at least one debit and
one credit.
• Every transaction must have at least one
debit and one credit.
3-29
Any Account
Left Side Right Side
Accountants refer to the left side of an account as the debit side
instead of saying the left side.
The right side of the account is called the credit side.
3-30
Debit Credit
+ -
Increase Decrease
Side Side
(Normal
Bal.)
Debit Credit
- +
Decrease Increase
Side Side
( Normal Bal.)
Debit Credit
- +
Decrease Increase Side
Side ( Normal Bal.)
Debit Credit
+ -
Increase Decrease
Side Side
(Normal
Bal.)
Debit Credit
- +
Decrease Increase
Side Side
(Normal
Bal.)
Debit Credit
+ -
Increase Decrease
Side Side
(Normal
Bal.)
Rules for Debits and CreditsAsset Accounts Liability Accounts Owner’s Capital Account
Owner’s Drawing Account Revenue Accounts Expense Accounts
3-31
Objective 5 Prepare a trial balance from T accounts
1. Use the proper heading.
2. List the accounts in chart of account order.
3. Enter the ending balance of each account in the
appropriate debit or credit column.
4. Total the debit column.
5. Total the credit column.
6. Compare the column totals. They should be equal.
3-32
DEBIT CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Jason Taylor, Capital
Accounts Payable
Jason Taylor, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals 132,000 132,000
83,500
7,000
90,000
4,000
35,000
7,000500
22,0007,000
5,000
3,000
JT’s Consulting Services
Trial Balance
December 31, 2010
3-33
Adding trial balance columns incorrectly
Recording only half a transaction – for example, recording
a debit but not recording a credit, or vice versa
Recording both halves of a transaction as debits or credits
rather than recording one debit and one credit
Recording an amount incorrectly from a transaction
Recording a debit for one amount and a credit for a
different amount
Making an error when calculating the account balances
Some common errors in a trial balance are:
3-34
Objective 6 Prepare an income statement, a statement
of owner’s equity, and a balance sheet
After the trial balance is prepared, the financial statements
are prepared.
Net income from the income statement is used on
the statement of owner’s equity.
The ending balance of the Jason Taylor, Capital
account, computed on the statement of owner’s
equity, is used on the balance sheet.
3-35
JT’s CONSULTING SERVICES
Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Cash 83,500.00 Accounts Payable 7,000.00
Accounts Receivable 5,000.00
Supplies 3,000.00
Prepaid Rent 7,000.00 OWNER’S EQUITY
Equipment 22,000.00 Jason Taylor, Capital 113,500.00
Total Assets 120,500.00 Total Liabilities and Owner’s Equity 120,500.00
JT’s CONSULTING SERVICES
Statement Of Owner’s Equity
Month Ended December 31, 2010
Jason Taylor, Capital, Dec. 1, 2010 90,000.00
Net Income for December 27,500.00
Less Withdrawals for December 4,000.00
Increase in Capital 23,500.00
Jason Taylor, Capital, Dec. 31, 2010 113,500.00
JT’s CONSULTING SERVICES
Income Statement
Month Ended December 31, 2010
Revenue
Fees Income 35,000.00
Expenses
Salaries Expense 7,000.00
Utilities Expense 500.00
Total Expenses 7,500.00
Net Income 27,500.00
3-36
Objective 7 Develop a chart of accounts
Each account has a number and a name.
The balance sheet accounts are listed first,
followed by the income statement accounts.
The account number is assigned based on the
type of account.
3-37
Balance Sheet Accounts
100-199 ASSETS
101 Cash
111 Accounts Receivable
121 Supplies
137 Prepaid Rent
141 Equipment
200-299 LIABILITIES
202 Accounts Payable
300-399 OWNER’S EQUITY
301 Jason Taylor, Capital
Statement of Owner’s Equity Account
302 Jason Taylor, DrawingIncome Statement Accounts
400-499 REVENUE
401 Fees Income
500-599 EXPENSES
511 Salaries Expense
514 Utilities Expense
JT’s CONSULTING SERVICES
Chart of Accounts
Account Number Account Name
3-38
A permanent account is an account
that is kept open from one
accounting period to the next.
A temporary account is an account
whose balance is transferred to
another account at the end of an
accounting period.
Permanent and Temporary Accounts
3-39
Thank Youfor using
College Accounting, 12th Edition
Price • Haddock • Farina
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