Chapter 3 – Analyzing Transactions into Debit and Credit Parts Lesson 03-1 (GJ) Chapter 3 – Analyzing Transactions into Debit and Credit Parts Objectives: Define accounting terms related to analyzing transactions into debit and credit parts Identify accounting practices related to analyzing transactions into debit and credit parts Use T accounts to analyze transactions showing which accounts are debited or credited for each transaction Analyze how transactions to set up a business affect accounts Analyze how transactions affect owner’s equity accounts   Essential Questions What are the two accounting rules that regulate increases and decreases in account balances? What are the four questions used to analyze a transaction? What is the normal balance side for assets, liabilities and owner’s equity accounts? What is the normal balance side for expenses, revenue and drawing accounts? In the real world, the effects of transactions are recorded in separate accounts. The T-account is used to show the left and right side of each account.

Balance Sheet Accounts (A = L + OE) Income Statement Accounts Lesson 03-1 (GJ) CHART OF ACCOUNTS Page 3 – check it… Balance Sheet Accounts (A = L + OE) Income Statement Accounts Revenue = money coming in (Sales) Expenses = money we have to spend to make money Miscellaneous – girl scout cookies, stamps, etc. Small amounts Utilities – phone, water, sewer, electric Things you need to keep the BUILDING going

A record summarizing all the information pertaining to Lesson 03-1 (GJ) ACCOUNTS dr. cr. A record summarizing all the information pertaining to a single item in the accounting equation is known as an account. Transactions change the balances of accounts. The T-account is used to analyze transactions. There are special names for the left and right side of the T-account. An amount recorded on the left side is called a debit. An amount recorded on the right side is a credit. The words debit and credit (taken from Latin: debere and credere) just mean left and right. A record summarizing all the information pertaining to a single item in the accounting equation = account EX: Cash A/P – Ling Music Supply Supplies Lesson 3-1, page 42

EVERY transaction must have a debit and a credit AND… Lesson 03-1 (GJ) ACCOUNT BALANCES Normal Balance (NB) means that is the side that the account increases on (+) The side of an account that is increased is the normal balance side. Assets have a normal balance on the debit (left) side – and so are increased by inserting amounts on the left. Liabilities and Owner’s Equity have a normal balance on the credit (right) side – and so are increased by inserting amounts on the right. EVERY transaction must have a debit and a credit AND… Debits = Credits Lesson 3-1, page 42

INCREASES AND DECREASES IN ACCOUNTS Lesson 03-1 (GJ) INCREASES AND DECREASES IN ACCOUNTS Accounts Payable Cash Accounts Payable Supplies Insurance Account balances increase on the normal balance side of the account. Account balances decrease on the other side. Capital Sales Exception: Expenses increase with Debit Drawing increases with Debit Lesson 3-1, page 43

List accounts according to next slide… Lesson 03-1 (GJ) Work Together 3-1 (p.44 wb35) List accounts according to next slide… (this will make it easier to check your work) & On Your Own 3-1 (p.44 wb36) Follow the same format for the OYO

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QUESTIONS FOR ANALYZING A TRANSACTION INTO ITS DEBIT AND CREDIT PARTS Lesson 03-1 (GJ) QUESTIONS FOR ANALYZING A TRANSACTION INTO ITS DEBIT AND CREDIT PARTS Which accounts are affected? How is each account classified? How is each classification changed? How is each amount entered in the accounts? The list of accounts that a business uses is called a chart of accounts. The Chart of Accounts for Encore Music is on Page 3 of your text.

RECEIVED CASH FROM OWNER AS AN INVESTMENT Lesson 03-1 (GJ) RECEIVED CASH FROM OWNER AS AN INVESTMENT August 1. Received cash from owner as an investment, $10,000.00. Which accounts are affected? Cash and Barbara Treviño, Capital are affected. How is each account classified? Cash is an asset account. Barbara Treviño, Capital is an owner’s equity (capital) account. How is each classification changed? Assets are increased. Owner’s Equity is increased. How is each amount entered in the accounts? Cash is debited. Barbara Treviño, Capital is credited + - - + Cash Barbara Trevino, Capital $10,000 $10,000 Lesson 3-2, page 45

PAID CASH FOR SUPPLIES August 3. Paid cash for supplies, $1,577.00. Lesson 03-1 (GJ) PAID CASH FOR SUPPLIES August 3. Paid cash for supplies, $1,577.00. + - + - 1. Supplies and Cash are affected. 2. Supplies and Cash are assets. 3. Assets (Supplies) are increased. Assets (Cash) are decreased. 4. Supplies is debited. Cash is credited. Lesson 3-2, page 46

PAID CASH FOR INSURANCE Lesson 03-1 (GJ) PAID CASH FOR INSURANCE August 4. Paid cash for insurance, $1,200.00. + - + - 1. Prepaid Insurance and Cash are affected. 2. Prepaid Insurance and Cash are assets. 3. Assets (Prepaid Insurance) are increased. Assets (Cash) are decreased. 4. Prepaid Insurance is debited. Cash is credited. Lesson 3-2, page 47

BOUGHT SUPPLIES ON ACCOUNT Lesson 03-1 (GJ) BOUGHT SUPPLIES ON ACCOUNT August 7. Bought supplies on account from Ling Music Supplies, $2,720.00. + - - + 1. Supplies and Accounts Payable—Ling Music Supplies are affected. 2. Supplies is an asset. Accounts Payable—Ling Music Supplies is a liability. 3. Assets are increased. Liabilities are increased. 4. Supplies is debited. Accounts Payable—Ling Music Supplies is credited. Lesson 3-2, page 48

Lesson 03-1 (GJ) PAID CASH ON ACCOUNT August 11. Paid cash on account to Ling Music Supplies, $1,360.00. 1,360.00 + - - + 1. Accounts Payable—Ling Music Supplies and Cash are affected. 2. Cash is an asset. Accounts Payable—Ling Music Supplies is a liability. 3. Assets are decreased. Liabilities are decreased. 4. Accounts Payable—Ling Music Supplies is debited. Cash is credited. Lesson 3-2, page 49

Work Together 3-2 (p.50 wb37) & On Your Own 3-2 (p.50 wb38) Lesson 03-1 (GJ) Work Together 3-2 (p.50 wb37) & On Your Own 3-2 (p.50 wb38)

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RECEIVED CASH FROM SALES Lesson 03-1 (GJ) RECEIVED CASH FROM SALES August 12. Received cash from sales, $325.00. 1. Cash and Sales are affected. 2. Cash is an asset. Sales is a revenue account that affects owner’s equity. 3. Assets are increased. Owner’s equity is increased. 4. Cash is debited. Sales is credited. Lesson 3-3, page 51

SOLD SERVICES ON ACCOUNT Lesson 03-1 (GJ) SOLD SERVICES ON ACCOUNT August 12. Sold services on account to Kids Time, $200.00. 1. Accounts Receivable—Kids Time and Sales are affected. 2. Accounts Receivable—Kids Time is an asset. Sales is a revenue account that affects owner’s equity. 3. Assets are increased. Owner’s equity is increased. 4. Accounts Receivable—Kids Time is debited. Sales is credited. Lesson 3-3, page 52

PAID CASH FOR AN EXPENSE Lesson 03-1 (GJ) PAID CASH FOR AN EXPENSE August 12. Paid cash for rent, $250.00. 1. Rent Expense and Cash are affected. Separate expense accounts are used to be able to keep better track of changes in OE 2. Cash is an asset. Rent Expense is an expense account that affects owner’s equity. 3. Assets are decreased. Owner’s equity is decreased; expenses are increased. 4. Rent Expense is debited. Cash is credited. Lesson 3-3, page 53

RECEIVED CASH ON ACCOUNT Lesson 03-1 (GJ) RECEIVED CASH ON ACCOUNT August 12. Received cash on account from Kids Time, $100.00. 1. Cash and Accounts Receivable—Kids Time are affected. 2. Cash and Accounts Receivable—Kids Time are assets. 3. Assets (Cash) are increased. Assets (Accounts Receivable—Kids Time) is decreased. 4. Cash is debited. Accounts Receivable—Kids Time is credited. Lesson 3-3, page 54

PAID CASH TO OWNER FOR PERSONAL USE Lesson 03-1 (GJ) PAID CASH TO OWNER FOR PERSONAL USE August 12. Paid cash to owner for personal use, $100.00. Barbara Trevino, Drawing 100.00 1. Barbara Trevino, Drawing and Cash are affected. Separate drawing accounts are used to be able to keep better track of changes in OE 2. Barbara Trevino, Drawing is an owner’s equity account. Cash is an asset account. 3. Owner’s equity is decreased by an increase in withdrawals. Assets are decreased. 4. Barbara Trevino, Drawing is debited. Cash is credited. Lesson 3-3, page 55

Work Together 3-3 (p.56 wb39) & On Your Own 3-3 (p.56 wb40) Lesson 03-1 (GJ) Work Together 3-3 (p.56 wb39) & On Your Own 3-3 (p.56 wb40)

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Lesson 03-1 (GJ) 3-5