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Chapter

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3 The Double Entry Framework

Learning Objective


1

Define the parts of a T account.


The T Account

Debit Credit

SHAPED LIKE a “T”


The T Account (cont.)

Debit Credit

Debit means

Left Credit means

Right



Dr. Cr. Abbreviation for Debit

Abbreviation for Credit



Dr. Cr.

CASH

Account Name


Every T account has an increase side and a decrease side Some accounts increase on the debit side and some accounts increase on the credit side


Learning Objective


2

Foot and balance a T account.


STEP #2: Find the balance by finding the difference between the debit and credit totals.

Balancing a T Account

$3,500 debit footing – 3,130 credit footing $ 370 balance


Balancing a T Account (cont.)

CASH

2,000 500 570 430

3,500 FOOTING

1,200

300 200

50 80

200 300 650 150

3,130

FOOTING

STEP #1 FOOT THE DEBIT AND CREDIT SIDES

To “Foot” means

to Total


Balancing a T Account (cont.)

CASH 2,000 500 570 430

3,500

1,200

300 200

50 80

200 300 650 150

3,130 370

BALANCE

The balance is written on the side with

the larger total.

Learning Objective


3

Describe the effects of debits and credits on specific types of accounts.


7 Rules of Debits and Credits


Rule #1

ASSET ACCOUNTS

Dr. Cr. +

Increase on

the debit side Decrease on

the credit side

–


In every transaction, debits must equal credits.

Rule #2


Rule #3

LIABILITY ACCOUNTS

Dr. Cr. +

Decrease on

the debit side

Increase on

the credit side

–


Rule #4

CAPITAL ACCOUNT

Dr. Cr. +

Decrease on

the debit side

Increase on

the credit side

JUST LIKE LIABILITY ACCOUNTS

–


Rule #5

DRAWING ACCOUNT

Dr. Cr. +

Increase on the debit side

Decrease on the credit side

JUST LIKE

ASSET ACCOUNTS

–


Rule #6

REVENUE ACCOUNTS

Dr. Cr. Decrease on

the debit side

Increase on

the credit side

JUST LIKE LIABILITY AND CAPITAL ACCOUNTS

+ –


Rule #7

EXPENSE ACCOUNTS

Dr. Cr. Increase on the

debit side Decrease on the

credit side

JUST LIKE ASSET ACCOUNTS

+ –

Learning Objective


4

Use T accounts to analyze transactions.


Purchased office supplies for $800 cash.

Example


Identify the accounts that are affected.

1st STEP

CASH OFFICE

SUPPLIES


Classify these accounts as assets, liabilities, owner’s equity, revenues, or expenses.

2nd STEP

CASH OFFICE

SUPPLIES


Owner’s Equity Umbrella

3-26


Identify the location of the accounts in the accounting equation and/or the owner’s equity umbrella—left or right.

3rd STEP

CASH DR. CR.

+

OFFICE SUPPLIES DR. CR.

+

–

–


Did Office Supplies increase or decrease in

this transaction?

Purchased Office Supplies for $800 Cash


INCREASED

OFFICE SUPPLIES DR. CR.

800 + –




Did Cash increase or decrease in this transaction?


DECREASED

CASH DR. CR.

800 + –



DR. +

CR. OFFICE SUPPLIES

800 –

CASH

800

DR. CR. + –

Debits = Credits


Purchased equipment on account for $3,000.

Example


Identify the accounts that are affected

1st STEP

.

EQUIPMENT ACCOUNTS

PAYABLE


Classify these accounts as assets, liabilities, owner’s equity, revenues, or expenses.

2nd STEP

EQUIPMENT

ACCOUNTS

PAYABLE





3rd STEP

EQUIPMENT DR. CR.

+ –

ACCOUNTS PAYABLE DR. CR.

+ –


Did Equipment increase or decrease in this

transaction?

Purchased Equipment on Account for $3,000


INCREASED

EQUIPMENT DR. CR.

3,000 + –



Did Accounts Payable increase or decrease in

this transaction?



INCREASED

ACCOUNTS PAYABLE DR. CR.

3,000

+ –



ACCOUNTS PAYABLE

3,000

CR. DR. CR. +

DR. +

EQUIPMENT

3,000

– –

Debits = Credits


D. Williams, the owner, invested $25,000 in the business.

Example


Identify the accounts that are affected and classify these accounts as assets, liabilities, owner’s equity, revenues, or expenses.

1st AND 2nd STEPS

D. WILLIAMS, CAPITAL

DR. CR.

OWNER’S EQUITY

CASH DR. CR.

ASSET



3-45



3rd STEP

CASH DR. CR.

+


DR. CR.

+ – –


Increased or Decreased?

CASH DR. CR.

+


DR. CR. +

INCREASED

25,000 25,000 – –

INCREASED


DR.


+ 25,000

CR. CASH

DR. CR. +

25,000 – –

Debits = Credits


Damon withdrew $1,500 for personal expenses.

Example



1st AND 2nd STEPS

D. WILLIAMS, CAPITAL CASH DR. CR. DR. CR.

OWNER’S EQUITY ASSET



3-51



3rd STEP

CASH DR. CR.

+

D. WILLIAMS, DRAWING

DR. CR. + – –



CASH DR. CR. +


DR. CR.

INCREASED DECREASED

1,500 1,500 + – –


DR.


1,500

CR. CASH

DR. CR.

1,500 + + – –

Debits = Credits


Damon performed services and received $4,500 in cash.

Example



1st AND 2nd STEPS

CONSULTING FEES CASH DR. CR. DR. CR.

REVENUE ASSET



3-57



3rd STEP

CASH DR. CR.

CONSULTING FEES DR. CR.

+ + – –



CASH DR. CR.

CONSULTING FEES

DR. CR.

4,500 4,500 + + – –

INCREASED INCREASED


DR.

CONSULTING FEES

4,500

CR. CASH

DR. CR.

4,500 + + – –

Debits = Credits


Damon performed $6,000 of services on account.

Example


DR.

6,000

CR.

ACCOUNTS RECEIVABLE

DR. CR.

6,000

ACCOUNTS RECEIVABLE

INSTEAD OF CASH

+ + – –

Debits = Credits

CONSULTING FEES


Damon Williams paid his assistant $750 in wages.

Example



1st AND 2nd STEPS

WAGES EXPENSE CASH DR. CR. DR. CR.

EXPENSE ASSET



3-65



3rd STEP

CASH DR. CR.

WAGES EXPENSE

DR. CR. + + – –



CASH DR. CR. DR. CR.

INCREASED DECREASED

750 750 + + – –

WAGES EXPENSE


DR. CASH

750

CR.

WAGES EXPENSE

DR. CR.

750 + + – –

Debits = Credits

Learning Objective


5

Prepare a trial balance and explain and explain its purposes and linkages with the financial statements.


A listing of all accounts and their balances A totaling of debits and credits Is proof that debits equal credits and that the accounting equation has remained in balance Used as an aid in preparing financial statements

The Trial Balance


Damon’s Campus Delivery Trial Balance June 30, 20--

Account Title Debit Balance Credit Balance

HEADING should include:

•Name of the company

•Title of the document—“Trial Balance”

•Date of the trial balance


Account Title Debit Balance Credit Balance Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment

370 00 650 00

200 00 3,600 00

80 00

All asset accounts are listed first



Account Title Debit Balance Credit Balance Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment Accounts Payable

370 00 650 00

200 00 3,600 00

1,800 00

Liabilities are shown next



Account Title Debit Balance Credit Balance Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment Accounts Payable D. Williams, Capital D. Williams, Drawing

370 00 650 00

200 00 3,600 00

1,800 00 2,000 00

80 00

150 00

Now the owner’s equity accounts



Account Title Debit Balance Credit Balance Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment Accounts Payable D. Williams, Capital D. Williams, Drawing Delivery Fees

370 00 650 00

200 00 3,600 00

1,800 00 2,000 00

80 00

150 00 2,150 00



Account Title Debit Balance Credit Balance Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment Accounts Payable D. Williams, Capital D. Williams, Drawing Delivery Fees Rent Expense Telephone Expense Wages Expense

370 00 650 00

200 00 3,600 00

1,800 00 2,000 00

80 00

150 00 2,150 00

200 00 50 00

650 00



Account Title Debit Balance Credit Balance Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment Accounts Payable D. Williams, Capital D. Williams, Drawing Delivery Fees Rent Expense Telephone Expense Wages Expense

370 00 650 00

200 00 3,600 00

1,800 00 2,000 00

80 00

150 00 2,150 00

200 00 50 00

650 00 5,950 00 5,950 00

It balances!!!

Debits = Credits


Documents

Chapterhorowitk/documents/Chapter_03.pdf · Chapter ... Supplies