Analyzing Transactions into Debit and Credit Parts Principles of Accounting I

Objectives By the end of the lesson, I will be able to: 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. verify the equality of debits and credits for each transaction.

What We Know We have learned how business transactions affect accounts in an accounting equation. Procedure is not practical in an actual accounting system. the number of accounts most businesses have would make the accounting equation cumbersome to use a separate record is commonly used for each account

Accounting Terms Accounting equation: shows relationship among assets, liabilities, and owner’s equity Asset: anything of value that is owned or controlled Capital: account used to summarize the owner’s equity Chart of accounts: list of accounts used in a business Credit: amount recorded on the right side of a T-account Debit: amount recorded on the left side of a T-account Liability: amount of money owed to the creditors of a business Normal balance: side of the account that is increased Owner’s equity: amount remaining after the value of all liabilities is subtracted from the value of all assets T-account: accounting device used to analyze transactions Transaction: business activity that changes assets, liabilities, or owner’s equity

The Accounting Equation Assets = Liabilities + Owner’s Equity The accounting equation can be represented as a “T”: Always draw T accounts when analyzing transactions to see the debit and credit sides.

What Does a T Account Look Like?

Location, location, location The normal balance side of an asset, liability, or capital account is based on the location of the account in the accounting equation

All about the sides…. The sides of the T account also show increases and decreases in account balances

Rules Two basic accounting rules regulate the increases and decreases of account balances: Account balances increase on the normal side of an account Account balances decrease on the opposite side of an account

Remember This… Asset accounts have normal debit balances increase on the debit side decrease on the credit side Liability accounts have normal credit balances increase on the credit side decrease on the debit side Owner’s equity account has a normal credit balance increases on the credit side decreases on the debit side

Let’s Review The normal balance side of an asset, liability, or capital account is based on what? The sides of the T account show what? Assets account have normal __________ balances. Liability accounts have normal __________balances. Owner’s Equity accounts have normal __________balances.

Analyze This…. Before a transaction is recorded in the records of a business, the information is analyzed to determine which accounts are changed and how. Each transaction changes the balances of at least two accounts and debits equal credits for each transaction. Four steps are used in analyzing a transaction: Determine what accounts will be affected Determine whether to increase or decrease the account Determine whether the increase/decrease needs to be a debit or a credit Make sure debits equal credits

Let’s Do This Together Using the Graphic Organizer, we will analyze the following transactions: Maria Sanchez took $25,000 from personal savings and deposited that amount to open a business checking account in the name of Roadrunner Delivery Service. Maria Sanchez transferred two telephones valued at $200 each from her home to the business. Roadrunner bought a used truck on account from North Shore Auto for $12,000. Roadrunner sold one telephone to Green Company for $200 on account.

On Your Own…. Using Microsoft Excel, you will create T accounts and basic formulas to analyze the transactions on your John Jones Computing handout.

Ticket Out of the Door List the normal balances Assets, Liabilities, and Owner’s Equity