Accounting Is Fun! Chapter Two T Accounts, Debits and Credits, Trial Balance, and Financial Statements

Performance Objectives Accounting Is Fun! Performance Objectives Determine balances of T accounts having entries recorded on both sides of the accounts Present the fundamental accounting equation with the T account form, and label the debit and credit sides Record directly in T accounts a group of business transactions involving changes in asset, liability, owner’s equity, revenue, and expense accounts for a service business Accounting Is Fun!

Performance Objectives Accounting Is Fun! Performance Objectives Prepare a trial balance Prepare: Income statement Statement of owner’s equity Balance sheet Recognize the effect of transpositions and slides on account balances Accounting Is Fun!

T Account Form Shaped like the letter T Accounting Is Fun! Shaped like the letter T One side for increases (+) to the account The other side for decreases (-) to the account Normal Balance The increase (plus) side of any T account. 34,120 Accounting Is Fun!

Compare Account Column to T Account Accounting Is Fun! Compare Account Column to T Account 34,120 Accounting Is Fun!

Debit & Credit What does Debit mean? What does Credit mean? Accounting Is Fun! Debit & Credit What does Debit mean? Forget what you know about debit cards! What does Credit mean? Forget what you know about credit cards! Accounting Is Fun!

Debit = Left Credit = Right In Accounting Debit = DR = Left Accounting Is Fun! In Accounting Debit = Left Debit = DR = Left Credit = Right Credit = CR = Right Accounting Is Fun!

Accounting Is Fun! T Accounts Assets The plus side for assets is placed on the left, and the minus side is placed on the right Accounting Is Fun!

T Accounts Liabilities and owner’s equity Accounting Is Fun! T Accounts Liabilities and owner’s equity Since these classifications are placed on the opposite side of the equals sign, the plus and minus signs are also placed on the opposite sides (switched around) Accounting Is Fun!

In Accounting Debit is Left Credit is Right DR is Left CR is Right Accounting Is Fun! In Accounting Debit is Left Credit is Right DR is Left CR is Right For every account this is true! Accounting Is Fun!

Accounting Is Fun! T Accounts Recall that we placed revenue and expenses under the umbrella of owner’s equity Revenue increases owner’s equity Expenses decrease owner’s equity Remember: Drawing is placed under the umbrella of the Capital account Accounting Is Fun!

Accounting Is Fun! Present The Fundamental Accounting Equation With The T Account Form, And Label The Debit And Credit Sides As Well As The Plus And Minus Sides We switch the plus and minus signs around on the other side of the equals sign so that we will be able to carry out double-entry accounting Whenever there is a minus in front of the account, we must “switch the plus & minus around” Accounting Is Fun!

Debits Must Always Equal Credits DR = CR Accounting Is Fun! Debits Must Always Equal Credits DR = CR The critical rule to remember is that the amount placed on the debit side of one or more accounts MUST equal that amount placed on the credit side of another account or accounts. Accounting Is Fun!

Record Directly In T Accounts A Group Of Business Transactions Involving Changes In Asset, Liability, Owner’s Equity, Revenue, And Expense Accounts For A Service Business Accounting Is Fun! Step 1 Which accounts are involved? Step 2 How should you classify the accounts? Asset Liability Capital Revenue Expenses Step 3 Are the accounts increased or decreased? Step 4 Which accounts are debited and which accounts are credited? Step 5 Balance the equations: DR = CR A = L + OE Accounting Is Fun!

Recording Business Transactions for a Service Business Accounting Is Fun! We will be recording business transactions for a company with the following details: Owner name: L. P. Arch Business name: Arch Copy Co. Business type: Sole proprietorship (one-person business) Accounting Is Fun!

Accounting Is Fun! Transaction (a): Arch deposited $70,000 in a bank account in name of business. Accounting Is Fun!

Transaction (b): Bought equipment, paying cash, $33,000. Accounting Is Fun! Transaction (b): Bought equipment, paying cash, $33,000. Accounting Is Fun!

Accounting Is Fun! Transaction (c): Bought equipment on account from Melton Office Supply, $7,000. Accounting Is Fun!

Transaction (d): Paid Melton Office Supply, a creditor, $2,000. Accounting Is Fun! Transaction (d): Paid Melton Office Supply, a creditor, $2,000. Accounting Is Fun!

Accounting Is Fun! Transaction (e): Arch invested her personal computer equipment having a fair market value of $6,200 in Arch Copy Co. Accounting Is Fun!

Transaction (f): Arch Copy Co. sold services for cash, $2,520. Accounting Is Fun! Transaction (f): Arch Copy Co. sold services for cash, $2,520. Accounting Is Fun!

Transaction (g): Paid rent for the month, $700. Accounting Is Fun! Transaction (g): Paid rent for the month, $700. Accounting Is Fun!

Accounting Is Fun! Transaction (h): Bought supplies (toner and paper) on credit. These supplies are used immediately; therefore, they are recorded as an expense ($600). Accounting Is Fun!

Accounting Is Fun! Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy. Accounting Is Fun!

Transaction (j): Received bill for newspaper advertising, $200. Accounting Is Fun! Transaction (j): Received bill for newspaper advertising, $200. Accounting Is Fun!

Accounting Is Fun! Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services performed. Accounting Is Fun!

Accounting Is Fun! Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account. Accounting Is Fun!

Transaction (m): Arch Copy Co. received and paid electric bill, $160. Accounting Is Fun! Transaction (m): Arch Copy Co. received and paid electric bill, $160. Accounting Is Fun!

Accounting Is Fun! Transaction (n): Arch Copy Co. paid on account $200 to City News for advertising. Accounting Is Fun!

Accounting Is Fun! Transaction (o): Arch Copy Co. paid wages of a part-time employee, $2,130. Accounting Is Fun!

Accounting Is Fun! Transaction (p): Bought additional equipment from Melton Office Supply, $3,520, paying $620 down with the remaining $2,900 on account. Accounting Is Fun!

Accounting Is Fun! Transaction (q): Arch Copy Co. received $850 cash on account from a credit customer. Accounting Is Fun!

Accounting Is Fun! Transaction (r): Arch Copy Co. received revenue from cash customers for the rest of the month, $4,220. Accounting Is Fun!

Accounting Is Fun! Transaction (s): Arch withdrew $2,500 in cash from the business for her personal use. Accounting Is Fun!

Accounting Is Fun! Footing Accounting Is Fun!

Accounting Is Fun! Balances Accounting Is Fun!

Performance Objective 5 Accounting Is Fun! Performance Objective 5 Prepare a trial balance Accounting Is Fun!

Prepare a Trial Balance Accounting Is Fun! Prepare a Trial Balance List the account balances in two columns Left column = Debits Right column = Credits List the accounts in the same order as the chart of accounts First the balance sheet accounts Then the income statement accounts Accounting Is Fun!

Trial Balance A trial run to prove that DR = CR Accounting Is Fun! Trial Balance A trial run to prove that DR = CR If DR = CR, then A = L + OE Accounting Is Fun!

Trial Balance Not a financial statement Don’t use dollar signs Accounting Is Fun! Trial Balance Not a financial statement Don’t use dollar signs Use a single underline under the list of figures to be added Use a double underline under column totals Accounting Is Fun!

Summarizing means preparing financial statements Accounting Accounting Is Fun! Process of: Analyzing Classifying Recording Summarizing Interpreting business transactions Summarizing means preparing financial statements Accounting Is Fun!

Performance Objective 6 Accounting Is Fun! Performance Objective 6 Prepare Income statement Statement of owner’s equity Balance sheet Accounting Is Fun!

All Financial Statements Accounting Is Fun! All Financial Statements Summarize useful financial information for users of accounting information: Owners/investors Managers Creditors Government agencies Accounting Is Fun!

All Financial Statements Accounting Is Fun! Have a three-line title Who: Name of the company (or owner) What: Title of financial statement When: Period of time or a single date Income Statement Or Statement of OE Balance Sheet Accounting Is Fun!

Accounting Is Fun! Income Statement Total Revenue – Total Expenses = Net Income (or Net Loss) Accounting Is Fun!

Revenues – Expenses Net Income Income Statement Accounting Is Fun! Answers the questions How profitable was the company over the past period? How much net income did the entity earn? Revenues – Expenses Net Income Accounting Is Fun!

What the Income Statement Tells Us Accounting Is Fun! What the Income Statement Tells Us Is the business profitable? What is the net income? Revenue > Expenses What is the net loss? Expenses > Revenue Accounting Is Fun!

Income Statement Income Statement—Also Known As Accounting Is Fun! Income Statement Income Statement—Also Known As Statement of income and expenses Profit and loss statement Results of operations Net Income—Also Known As Profit Earnings Accounting Is Fun!

Accounting Is Fun! Net Income Use the net income figure on the income statement to complete the statement of owner’s equity Accounting Is Fun!

Statement of Owner’s Equity Accounting Is Fun! Prepared after you finish the income statement Answers the questions How did the owner’s equity change over the last period? How and why did the Capital account change? Provides ending Capital amount for use on the balance sheet 00 Accounting Is Fun!

Additional Investment in the Company Accounting Is Fun! Additional Investment in the Company Can you invest assets other than cash? Tools? Trucks? Equipment? Yes! They must be recorded at their fair market value (what they would be sold for on the open market) Accounting Is Fun!

Accounting Is Fun! Balance Sheet Accounting Is Fun!

Balance Sheet Answers the questions Accounting Is Fun! Balance Sheet Answers the questions What is the entity’s financial position on the last day of the period? What assets, liabilities, and equities does the entity have on the last day of the period? Uses the ending capital figure shown on the statement of owner’s equity Resembles a snapshot—shows a point in time Be careful of the date! Accounting Is Fun!

Balance Sheet List accounts in the same order as the chart of accounts Accounting Is Fun! Balance Sheet List accounts in the same order as the chart of accounts Why? Listed in order of liquidity Liquidity: How quickly it can be turned into cash Report Form Balance Sheet presentation where Assets are above Liabilities and Owner’s Equity Accounting Is Fun!

Errors Exposed by the Trial Balance Accounting Is Fun! DR ≠ CR? Arithmetic error Trial balance columns added correctly? Accounts added correctly? Half an entry DR without a CR? Example: If Trial Balance is off by $100, did you record the DR without the CR? DR ≠ CR? Both sides of an entry on one side (two DRs) Example: If the Trial Balance is off by $200, divide by 2 to get $100 and look for transactions for the amount $100 ($100 DR to Cash and $100 DR to Revenue) Recording amounts incorrectly Look back to original receipt, source document, or problem Accounting Is Fun!

Errors Exposed by the Trial Balance Accounting Is Fun! Errors Exposed by the Trial Balance When DR = CR, there can still be an error if you: Forgot to record a transaction Recorded the transaction twice Recorded the transaction for an incorrect amount Recorded the amount in the incorrect account Accounting Is Fun!

How Do You Find the Errors? Accounting Is Fun! How Do You Find the Errors? Pay careful attention as you record transactions. Look to see if a normal balance was placed in the wrong column. Re-add the columns. Check to see if account totals were transferred correctly. Recalculate the footings and balances in the accounts. Accounting Is Fun!

Performance Objective 7 Accounting Is Fun! Performance Objective 7 Recognize the effect of transpositions and slides on account balances Accounting Is Fun!

Transpositions and Slides Accounting Is Fun! Transpositions and Slides Transposition error Digits have been transposed (switched around) Slide error The decimal point in an amount has been misplaced “Slide the decimal place” Accounting Is Fun!

Transpositions and Slides Accounting Is Fun! Transpositions and Slides Finding an error Divide the difference between two trial balance totals by 2, or multiply by 2. See if the result matches a transaction amount. Errors divisible by 9: If an error exists and the amount of difference between the totals of the trial balance is evenly divisible by 9, the error consists of either a transposition or a slide or both. Accounting Is Fun!

Demonstration Problem Accounting Is Fun! Demonstration Problem We will be recording business transactions for a company with the following details: Accounting Is Fun!

Accounting Is Fun! Transaction (a): Nelson deposited $43,000 in a bank account in the name of business. Accounting Is Fun!

Transaction (b): Bought truck, paying cash, $23,000. Accounting Is Fun! Transaction (b): Bought truck, paying cash, $23,000. Accounting Is Fun!

Accounting Is Fun! Transaction (c): Bought camper shell for truck on account from Louie's Trucks & Campers, $2,500. Accounting Is Fun!

Transaction (d): Paid Louie's Trucks & Campers, a creditor, $1,500. Accounting Is Fun! Transaction (d): Paid Louie's Trucks & Campers, a creditor, $1,500. Accounting Is Fun!

Accounting Is Fun! Transaction (e): Nelson invested his own personal computer equipment, having a fair market value of $3,400, in WindSport Boomerang & Kite Demos. Accounting Is Fun!

Accounting Is Fun! Transaction (f): Nelson and employee performed boomerang & kite demo for Girl Scouts and received cash, $2,500. Accounting Is Fun!

Transaction (g): Paid rent for the month, $700. Accounting Is Fun! Transaction (g): Paid rent for the month, $700. Accounting Is Fun!

Accounting Is Fun! Assets = Liabilities + Owner's Equity + Revenue – Expenses + – – + – + – + + – Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash Accounts Payable R. P. Nelson, Capital Income from Demos Wages Expense + – – + – + – + + – Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit a) 43,000 b) 23,000 d) 1,500 c) 2,500 a) 43,000 f) 2,500.0 f) 2,500 d) 1,500 h) 600 e) 3,400 g) 700 Rent Expense + – R. P. Nelson, Drawing Debit Credit + - g) 700 Debit Credit Supplies Expense + – Debit Credit h) 600 Advertising Expense Accounts Receivable + – + – Debit Credit Debit Credit Traveling Expense + – Prepaid Insurance Debit Credit + – Debit Credit Transaction (h): WindSport B&K Demos bought supplies (toner and paper) on credit. These supplies are used immediately so they are recorded as an expense ($600). Equipment + – Debit Credit b) 23,000 c) 2,500 e) 3,400 Accounting Is Fun!

Accounting Is Fun! Assets = Liabilities + Owner's Equity + Revenue – Expenses + – – + – + – + + – Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash Accounts Payable R. P. Nelson, Capital Income from Demos Wages Expense + – – + – + – + + – Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit a) 43,000 b) 23,000 d) 1,500 c) 2,500 a) 43,000 f) 2,500 f) 2,500 d) 1,500 h) 600 e) 3,400 g) 700 Rent Expense i) 2,000 + – R. P. Nelson, Drawing Debit Credit + - g) 700 Debit Credit Supplies Expense + – Debit Credit h) 600 Advertising Expense Accounts Receivable + – + – Debit Credit Debit Credit Traveling Expense + – Prepaid Insurance Debit Credit + – Debit Credit i) 2,000 Transaction (i): WindSport B & K Demos paid $2,000 for a one-year liability insurance policy. Equipment + – Debit Credit b) 23,000 c) 2,500 e) 3,400 Accounting Is Fun!

Accounting Is Fun! Assets = Liabilities + Owner's Equity + Revenue – Expenses + – – + – + – + + – Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash Accounts Payable R. P. Nelson, Capital Income from Demos Wages Expense + – – + – + – + + – Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit a) 43,000 b) 23,000 d) 1,500 c) 2,500 a) 43,000 f) 2,500 f) 2,500 d) 1,500 h) 600 e) 3,400 g) 700 j) 200 Rent Expense i) 2,000 + – R. P. Nelson, Drawing Debit Credit + - g) 700 Debit Credit Supplies Expense + – Debit Credit h) 600 Advertising Expense Accounts Receivable + – + – Debit Credit Debit Credit j) 200 Traveling Expense + – Prepaid Insurance Debit Credit + – Debit Credit i) 2,000 Transaction (j): WindSport B & K Demos received an advertising bill from City News for advertising, $200. Equipment + – Debit Credit b) 23,000 c) 2,500 e) 3,400 Accounting Is Fun!

Accounting Is Fun! Transaction (k): Nelson and employee performed boomerang & kite demo for Boy Scouts and earned income on account ("sold services on account"), $2,500. Accounting Is Fun!

Accounting Is Fun! Transaction (l): WindSport B & K Demos paid $1,000 to Louie's Trucks & Campers, its creditor, as final payment on account. Accounting Is Fun!

Accounting Is Fun! Transaction (m): WindSport B & K Demos received and paid the gas card bill, $160 (Traveling Expense). Accounting Is Fun!

Accounting Is Fun! Transaction (n): WindSport B & K Demos pays $200 on account to City News for advertising. Accounting Is Fun!

Accounting Is Fun! Transaction (o): WindSport B & K Demos pays wages for a part-time employee, $1,030. Accounting Is Fun!

Accounting Is Fun! Transaction (p): WindSport B&K Demos buys a trailer from Louie's Trucks & Campers for $2,120, paying $620 down with the remaining $1,500 on account (Equipment, A/P, and Cash accounts). Accounting Is Fun!

Accounting Is Fun! Transaction (q): WindSport B & K Demos receives $850 cash on account from a credit customer. Accounting Is Fun!

Accounting Is Fun! Transaction (r): WindSport B & K Demos receives revenue from cash customers for the rest of the month, $4,220. Accounting Is Fun!

Accounting Is Fun! Transaction (s): Nelson withdraws $2,500 in cash from the business for his personal living costs. Accounting Is Fun!

Accounting Is Fun! Footing Accounting Is Fun!

Accounting Is Fun! Balances Accounting Is Fun!

Accounting Is Fun! Trial Balance Accounting Is Fun!

Accounting Is Fun! Income Statement Accounting Is Fun!

Statement of Owner’s Equity Accounting Is Fun! Statement of Owner’s Equity Accounting Is Fun!

Accounting Is Fun! Balance Sheet Accounting Is Fun!