Analyzing Transactions LO 1 – Characteristics of an Account and Chart of Accounts

Using Accounts to Record Transactions LO 1 Using Accounts to Record Transactions Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account. Accounting systems are designed to show the effects of each individual transaction on the elements of the financial statement. Each element of the financial statement--each asset, each liability, each owner’s equity--is called an account. In its simplest form, it is called a T account.

The T account has a title. LO 1 The T Account Title The T account has a title. It is called a T account because it is looks like the letter T. The title of the individual account is listed on the top of the T account.

The left side of the account is called the debit side. LO 1 The T Account Title Debit The left side of the account is called the debit side. The left side of the T account is referred to as the debit side of the account. The term debit stems from the Latin word for left.

The right side of the account is called the credit side. LO 1 The T Account Title Debit Credit The right side of the account is called the credit side. The right side of the account is called the credit side. The word credit comes from the Latin word for right.

Cash The T Account (a) 25,000 (b) 20,000 (d) 7,500 (e) 3,650 (f) 950 LO 1 The T Account Cash (a) 25,000 (b) 20,000 (d) 7,500 (e) 3,650 Credit Side of Account Debit Side of Account (f) 950 (h) 2,000 Balance 5,900 Balance of the account

The Cash account column from Exhibit 1. LO 1 The T Account Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 The Cash account column from Exhibit 1. This column illustrates the Cash account column from Exhibit 1 in the text.

The T Account LO 1 Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 Cash (a) 25,000 The transaction labeled a., which is an increase to cash of $25,000, is entered as a debit to the Cash T account.

The T Account LO 1 Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 Cash (a) 25,000 (b) 20,000 The $20,000 subtraction to cash, labeled b., is entered as a credit in the Cash T account. The letter b. is written next to the amount for reference.

The T Account LO 1 Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 Cash (a) 25,000 (d) 7,500 (b) 20,000 No entry is made for transaction c., since it had no effect upon the balance of cash. The $7,500 increase to cash, labeled d., is entered as a debit to the Cash T account.

The T Account LO 1 Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 Cash (a) 25,000 (d) 7,500 (b) 20,000 (e) 3,650 The $3,650 decrease to cash, labeled e., is entered as a credit to the Cash T account.

The T Account LO 1 Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 Cash (a) 25,000 (d) 7,500 (b) 20,000 (e) 3,650 (f) 950 The $950 decrease to cash, labeled f., is entered as a credit to the Cash T account.

The T Account LO 1 Cash a. +25,000 b. –20,000 Bal. 5,000 c. 0 d. + 7,500 Bal. 12,500 e. – 3,650 Bal. 8,850 f. – 950 Bal. 7,900 g. 0 h. – 2,000 Bal. 5,900 Cash (a) 25,000 (d) 7,500 (b) 20,000 (e) 3,650 (f) 950 (h) 2,000 No entry is made for transaction g., since it had no effect upon the balance of cash. The $2,000 decrease to cash, labeled h., is entered as a credit to the Cash T account.

The T Account LO 1 Total 32,500 Total 26,600 Cash (a) 25,000 (d) 7,500 (b) 20,000 (e) 3,650 (f) 950 (h) 2,000 Total 32,500 Total 26,600 To get the account balance, the Debit column total of $32,500 and the Credit column total of $26,600 dollars are needed.

The T Account LO 1 Balance 5,900 Balance of the account Cash (d) 7,500 (b) 20,000 (e) 3,650 (f) 950 (h) 2,000 To obtain the account balance, the total credits of $26,600 are subtracted from the total debits of $32,500. The balance of the account equals a debit balance of $5,900. This amount is written on the debit side of the account since it is a debit balance. It means that the total debits to the Cash account are greater than the total credits to the Cash account. Balance 5,900 Balance of the account

LO 1 Chart of Accounts A group of accounts for a business entity is called a ledger. A list of the accounts in the ledger is called a chart of accounts. A chart of accounts is a numbering system used by a company to organize the accounts efficiently and minimize recording errors. Traditionally, the accounts appear in the order in which they appear on the financial statements. The balance sheet accounts are listed first, followed by the income statement accounts.

LO 1 Chart of Accounts Assets are resources owned by the business. Some examples of assets are: Cash Supplies Accounts receivable Buildings The balance sheet accounts are listed first in a chart of accounts, in the order of assets, liabilities, and owner’s equity. Assets are resources owned by the business entity.

LO 1 Chart of Accounts Liabilities are debts owed to outsiders (creditors). Some examples of liabilities are: Accounts payable Notes payable Wages payable Interest payable After the assets, liability accounts come next in a company’s chart of accounts. Liabilities are debts owed to creditors.

LO 1 Chart of Accounts Owner’s equity is the owner’s right to the assets of the business after all liabilities have been paid. For a proprietorship, the owner’s equity is represented by the balance of the owner’s capital account. A drawing account represents the amount of withdrawals made by the owner. Owner’s equity is the last set of balance sheet accounts to appear in the chart of accounts. Owner’s equity is the owner’s residual right to the assets of the business after all liabilities have been satisfied.

LO 1 Chart of Accounts Revenues are increases in owner’s equity as a result of selling services or products to customers. Some examples of revenue accounts are: Fees earned Commission revenue Rent revenue The income statement accounts in a chart of accounts are listed in order of revenue, then expenses. Revenue is the amount a company expects to receive when it sells goods or services.

LO 1 Chart of Accounts The using up of assets or consuming services in the process of generating revenues results in expenses. Some examples of expenses are: Wages expense Rent expense Miscellaneous expense Expense accounts follow revenue accounts in a chart of accounts. Expenses are the costs incurred by the company to provide goods or services for sale.