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Published byAmanda Howard Modified over 9 years ago
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Business Accounts An account is a location within an accounting system in which the increases and decreases in a specific asset, liability, or owner’s equity are recorded and stored. All the accounts of a business are grouped together in a ledger. A ledger is a book or a file containing a separate page for each business account. The ledger serves as a permanent record of financial transactions. That sounds a little confusing.
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Chart of Accounts To keep track of its accounts, a business develops a Chart of Accounts. Let’s take another look at the list of accounts for Roadrunner Delivery Service Assets = Liabilities + Owner’s Equity Cash in Bank Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Accounts PayableM. Sanchez, Capital We should probably make this look a little more official.
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Numbering the Chart of Accounts All Liability accounts begin with 2.2. All Owner’s Equity accounts begin with 3.3. All Asset accounts begin with 1.1. All Revenue accounts begin with 4.4. All Expense accounts begin with 5.5. Let’s see what the Roadrunner Delivery Service Accounts would look like.
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Roadrunner Delivery Service Chart of Accounts Chart of Accounts Roadrunner Delivery Service Assets Cash in Bank Accounts Receivable – City News Accounts Receivable – Green Company Computer Equipment Office Equipment Delivery Equipment 101 105 110 115 120 125 Liabilities Accounts Payable – Beacon Advertising Accounts Payable – North Shore Auto 201 205 Owner’s Equity M. Sanchez, Capital M. Sanchez, Withdrawals Income Summary 301 302 303 Revenue Delivery Revenue 401 Expenses Advertising Expense Maintenance Expense Rent Expense Utilities Expense 501 505 510 515
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Terms You Need to Know Double-Entry Accounting A system of recordkeeping in which each business transaction affects at least two accounts. T Account Shows the dollar increase or decrease in an account that is caused by a transaction. It is called a T Account because it is shaped like a T.
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Debit and Credit Debit An amount entered on the left side of the T account. Credit An amount entered on the right side of the T account. Let’s take a look at a T account. Account Name Left Side Debit Side Right Side Credit Side Debit means left side Credit means right side
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Rules for Asset Accounts An asset account is increased on the debit side. An asset account is decreased on the credit side. The normal balance for an asset account is the debit side. Asset Account Debit SideCredit Side Normal Balance +- Increase on the left side Decrease on the right side Normal balance on the debit side
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Rules for Liability Accounts A liability account is increased on the credit side. A liability account is decreased on the debit side. The normal balance for a liability account is the credit side. Liability Account Debit SideCredit Side Normal Balance -+ Decrease on the left side Increase on the right side Normal balance on the credit side
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Rules for Owner’s Equity Accounts An owner’s equity account is increased on the credit side. An owner’s equity account is decreased on the debit side. The normal balance for an owner’s equity account is the credit side. Owner’s Equity Account Debit SideCredit Side Normal Balance -+ Decrease on the left side Increase on the right side Normal balance on the credit side
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Summary of Rules for Debits and Credits Asset Account Debit Side + Normal Balance Credit Side - Liability Account Debit SideCredit Side +- Normal Balance Owner’s Equity Account Debit SideCredit Side +- Normal Balance Let’s review the basic accounting equation. =+ Hey, the accounts on the left side of the equation are increased on the left side, and the accounts on the right side of the equation are increased on the right side. The normal balance side is the increase side
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Debits and Credits for Business Transactions Before we can apply the rules of debits and credits to business transactions, there is one very important rule that needs to be pointed out. For every debit there must be a credit of equal value. That’s very important. Don’t forget it!
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Investments by the Owner Business Transaction 1 Maria Sanchez took $ 25,000 from her personal savings and deposited that amount to open a business account in the name of Roadrunner Delivery Service. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Cash in Bank and M. Sanchez, Capital Cash in Bank is an asset account and M. Sanchez, Capital is an owner’s equity account Cash in Bank is increased by $ 25,000 and M. Sanchez, Capital is increased by $ 25,000 Asset accounts are increased on the debit side and owner’s equity accounts are increased on the credit side Cash in Bank +- 25,000 M. Sanchez, Capital +- 25,000 Debit = 25,000 Credit Debits equal credits
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Additional Investments by the Owner Business Transaction 2 The owner, Maria Sanchez, took two telephones valued at $ 200 each (total $ 400) from her home and transferred them to the business as Office Equipment. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Office Equipment and M. Sanchez, Capital Office Equipment is an asset account and M. Sanchez, Capital is an owner’s equity account Office Equipment is increased by $ 400 and M. Sanchez, Capital is increased by $ 400 Asset accounts are increased on the debit side and owner’s equity accounts are increased on the credit side Office Equipment +- 400 M. Sanchez, Capital +- 400 Debit = 400 Credit Debits equal credits
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Cash Payment Transactions Business Transaction 3 Roadrunner issued a $ 3,000 check to purchase a computer system. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Computer Equipment and Cash in Bank Computer Equipment is an asset account and Cash in Bank is an asset account Computer Equipment is increased by $ 3,000 and Cash in Bank is decreased by $ 3,000 Asset accounts are increased on the debit side and asset accounts are decreased on the credit side Computer Equipment +- 3,000 Cash in Bank -+ 3,000 Debit = 3,000 Credit Debits equal credits
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Buying on Credit Transactions Business Transaction 4 Roadrunner bought a used truck on account from North Shore Auto for $ 12,000. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Delivery Equipment and Accounts Payable Delivery Equipment is an asset account and Accounts Payable is a liability account Delivery Equipment is increased by $ 12,000 and Accounts Payable is increased by $ 12,000 Asset accounts are increased on the debit side and liability accounts are increased on the credit side Delivery Equipment +- 12,000 Accounts Payable +- 12,000 Debit = 12,000 Credit Debits equal credits
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Selling on Credit Transactions Business Transaction 5 Roadrunner sold one telephone to Green Company for $ 200 on account. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Accounts Receivable and Office Equipment Accounts Receivable is an asset account and Office Equipment is an asset account Accounts Receivable is increased by $ 200 and Office Equipment is decreased by $ 200 Asset accounts are increased on the debit side and asset accounts are decreased on the credit side Accounts Receivable +- 200 Office Equipment -+ 200 Debit = 200 Credit Debits equal credits
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Credit Payment Transactions Business Transaction 6 Roadrunner issued a check for $ 350 in partial payment of the amount owed to its creditor, North Shore Auto. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Cash in Bank and Accounts Payable Cash in Bank is an asset account and Accounts Payable is a liability account Cash in Bank is decreased by $ 350 and Accounts Payable is decreased by $ 350 Asset accounts are decreased on the credit side and liability accounts are decreased on the debit side Cash in Bank +- 350 Accounts Payable +- 350 Credit = 350 Debit Debits equal credits
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Credit Receivable Transactions Business Transaction 7 Roadrunner received and deposited a check for $200 from Green Company. The check received was full payment for the telephone sold on account in transaction 5. 1) Identify 2) Classify 3) Increase or Decrease 4) Debit and Credit Rule 5) Do Debits Equal Credits Accounts affected are Cash in Bank and Accounts Receivable Cash in Bank is an asset account and Accounts Receivable is an asset account Cash in Bank is increased by $ 200 and Accounts Receivable is decreased by $ 200 Asset accounts are increased on the debit side and asset accounts are decreased on the credit side Cash in Bank +- 200 Accounts Receivable -+ 200 Debit = 200 Credit Debits equal credits
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Summary of Debit and Credit Transactions (1) 25,000 25,000 (1) (2) 400 400 (2) (3) 3,000 3,000 (3) (4) 12,000 12,000 (4) (5) 200 200 (5)(6) 350 350 (6)(7) 200 200 (7) Bal 21,850 ------ 3,000 200 12,000 11,650 25,400 Total Debits 37,050 Total Credits 37,050 = AssetsLiabilitiesOwner’s Equity 37,05011,65025,400 =+
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Problem 4-5 (1) 45,000 45,000 (1)(2) 8,500 8,500 (2)(3) 85 85 (3) (4) 200 200 (4) (5) 3,000 3,000 (5) (6) 200 200 (6) (7) 1,500 1,500 (7) Bal 40,515 100 1,500 85 8,500 5,500 45,200 Total Debits 50,700 Total Credits 50,700 = AssetsLiabilitiesOwner’s Equity 50,7005,50045,200 =+ (8) 100 100 (8)
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