Recording Business Transactions © Paradigm Publishing, Inc.1 Chapter 2

Learning Objectives 1.Explain the double-entry accounting framework. Explain the double-entry accounting framework.Explain the double-entry accounting framework. 2.Describe the standard form of account. Describe the standard form of account.Describe the standard form of account. 3.Describe the T account. Describe the T account.Describe the T account. 4.Explain the rules of debit and credit as applied to asset, liability, and owner’s equity accounts. Explain the rules of debit and credit as applied to asset, liability, and owner’s equity accounts.Explain the rules of debit and credit as applied to asset, liability, and owner’s equity accounts. © Paradigm Publishing, Inc.2

5.Explain the need for temporary owner’s equity accounts. Explain the need for temporary owner’s equity accounts.Explain the need for temporary owner’s equity accounts. 6.Explain the rules of debit and credit as applied to temporary owner’s equity accounts. Explain the rules of debit and credit as applied to temporary owner’s equity accounts.Explain the rules of debit and credit as applied to temporary owner’s equity accounts. 7.Record business transactions in T accounts and prepare a trial balance. Record business transactions in T accounts and prepare a trial balance.Record business transactions in T accounts and prepare a trial balance. © Paradigm Publishing, Inc.3 Learning Objectives

Explain the double-entry accounting framework © Paradigm Publishing, Inc.4 Learning Objective 1

Each business transaction has at least two effects, both of which are recorded in the accounting records. Business transactions are NOT recorded twice. © Paradigm Publishing, Inc.5

Separate records  Called accounts  Needed to show increases and decreases in each Asset Asset Liability Liability Aspect of owner’s equity Aspect of owner’s equity © Paradigm Publishing, Inc.6

Describe the standard form of account © Paradigm Publishing, Inc.7 Learning Objective 2

Accounts are the basic storage units for accounting data. A separate account is maintained for each asset, liability, and owner’s equity item. © Paradigm Publishing, Inc.8

Three major parts The account title and number The left side, which is called the debit side The right side, which is called the credit side © Paradigm Publishing, Inc.9

10 Describe the T account Learning Objective 3

The left side is the debit side. The right side is the credit side. Debit means "left", and credit means "right". Whether an account is increased or decreased by a debit or credit depends on the type of account. © Paradigm Publishing, Inc.11

© Paradigm Publishing, Inc.12 Learning Objective 4 Explain the rules of debit and credit as applied to asset, liability, and owner’s equity accounts

© Paradigm Publishing, Inc.13

Review Quiz 2-1 Do the terms debit and credit mean increase or decrease, or may they mean either? Explain. © Paradigm Publishing, Inc.14

Example Susan Gilbert invests $5,000 in her candy and gift business. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.15 Analyze the transaction and decide which T accounts are affected. Decide which account requires a debit and which account requires a credit. Cash, an asset account, is increasing and requires a debit. Susan Gilbert, Capital, an owner’s equity account, is increasing and requires a credit.

Example Answer Susan Gilbert invests $5,000 in her candy and gift business. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.16 Cash 5,000 Susan Gilbert, Capital 5,000

Example Susan Gilbert purchases equipment on account costing $700. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.17 Analyze the transaction and decide which T accounts are affected. Decide which account requires a debit and which account requires a credit. Equipment, an asset account, is increasing and requires a debit. Accounts Payable, a liability account, is increasing and requires a credit.

Example Answer Susan Gilbert purchases equipment on account costing $700. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.18 Equipment 700 Accounts Payable 700

Quick Check © Paradigm Publishing, Inc.19 The purchase of land on account a.increases assets and decreases liabilities. b.increases assets and increases owner’s equity. c.increases liabilities and increases owner’s equity. d.decreases assets and increases liabilities. e.increases assets and increases liabilities.

Review Quiz 2-2 © Paradigm Publishing, Inc.20 Cash (a) 8,000(c) 500 (e) 600 Accounts Payable (e) 600(b) 1,200 (d) 300 Office Supplies (c) 500 Greg Calloway, Capital (a)8,000 Shop Supplies (d) 300 Equipment (b) 1,200

Explain the need for temporary owner’s equity accounts © Paradigm Publishing, Inc.21 Learning Objective 5

When the account period is over, the balances of these temporary accounts are transferred to the owner’s capital account. Include Revenues Revenues Expenses Expenses Owner’s Drawing Owner’s Drawing © Paradigm Publishing, Inc.22

© Paradigm Publishing, Inc.23 Learning Objective 6 Explain the rules of debit and credit as applied to temporary owner’s equity accounts

© Paradigm Publishing, Inc.24 Revenue Accounts DebitCredit -+ Owner’s Drawing Account Debit Credit +- Expense Accounts DebitCredit +-

Example Susan Gilbert performs $1,300 of services on account. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.25 Analyze the transaction and decide which T accounts are affected. Decide which account requires a debit and which account requires a credit. Accounts Receivable, an asset account, is increasing and requires a debit. Service Revenue, a revenue account, is increasing and requires a credit.

Example Answer Susan Gilbert performs $1,300 of services on account. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.26 Accounts Receivable 1,300 Service Revenue 1,300

Example Susan Gilbert pays rent of $800 for the current month. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.27 Analyze the transaction and decide which T accounts are affected. Decide which account requires a debit and which account requires a credit. Rent Expense, an expense account, is increasing and requires a debit. Cash, an asset account, is decreasing and requires a credit.

Example Answer Susan Gilbert pays rent of $800 for the current month. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.28 Rent Expense 800 Cash 800

Example Susan Gilbert withdraws $500 from the business for personal use. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.29 Analyze the transaction and decide which T accounts are affected. Decide which account requires a debit and which account requires a credit. The Owner’s Drawing account, a temporary owner’s equity account, is increased with a debit. Cash, an asset account, is decreasing and requires a credit.

Example Answer Susan Gilbert withdraws $500 from the business for personal use. Let’s record the transaction in the appropriate T accounts. © Paradigm Publishing, Inc.30 Susan Gilbert, Drawing 500 Cash 500

© Paradigm Publishing, Inc.31 The payment of utilities for the current month a.increases assets and decreases liabilities. b.increases assets and increases expenses. c.increases liabilities and decreases expenses. d.decreases assets and increases expenses. e.increases owner’s equity and increases expenses. Quick Check

Review Quiz 2-3 © Paradigm Publishing, Inc.32 Lynn Dowdy, Drawing (f) 500 Cash (a)5,000(b)600 (c)540 (d)1,800 (e)200 (f)500

Review Quiz 2-3 © Paradigm Publishing, Inc.33 Service Revenue (a) 5,000 RentExpense (b) 600 SalariesExpense (d) 1,800 UtilitiesExpense (c) 540 RepairsExpense (e) 200

© Paradigm Publishing, Inc.34 Learning Objective 7 Record business transactions in T accounts and prepare a trial balance

The balance of any account is the difference between the account's  Total debits  Total credits Balances are arrived at by  Footing (adding) the debit and credit columns of each account  Calculating the difference between the two columns © Paradigm Publishing, Inc.35

Example The balance of the Cash account of Walker and Associates is found as follows: © Paradigm Publishing, Inc.36

© Paradigm Publishing, Inc.37

© Paradigm Publishing, Inc.38

© Paradigm Publishing, Inc.39

A trial balance is prepared at the end of the accounting period to ensure the total debits equal the total credits. © Paradigm Publishing, Inc.40

© Paradigm Publishing, Inc.41

The normal balance of any account is the increase side. © Paradigm Publishing, Inc.42

Quick Check © Paradigm Publishing, Inc.43 The normal balance of Service Revenue is a.a debit. b.a credit. c.impossible to determine without more information. d.a debit or credit depending on management’s intent.

Review Quiz 2-4 © Paradigm Publishing, Inc.44

© Paradigm Publishing, Inc.45

Quick Check © Paradigm Publishing, Inc.46 Which group of accounts are increased with debits? a.Assets and Liabilities b.Liabilities and Owner’s Drawing account c.Assets and Revenues d.Revenues and Expenses e.Assets and Expenses

Review Quiz 2-5 Why do expense accounts and the owner’s drawing account have debit balances? © Paradigm Publishing, Inc.47

Focus on Ethics © Paradigm Publishing, Inc.48 Is it ethical to replace Board of Directors in a corporation if they have not been charged with any fraudulent activities?

© Paradigm Publishing, Inc.49 Total Debits = Total Credits Joining the Pieces