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

2. 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.

3. 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.

4. 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.

5. 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.

6. 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

7. 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. –
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.

8. 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. –
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.

9. 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. –
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.

10. 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. –
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.

11. 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. –
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.

12. 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. –
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.

13. 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. –
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.

14. 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, Total ,600
To get the account balance, the Debit column total of $32,500 and the Credit column total of $26,600 dollars are needed.

15. 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

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.