2. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 2-3 Analyzing How Transactions Affect Owner’s Equity Accounts

3. CENTURY 21 ACCOUNTING © Thomson/South-Western Review: What is “An accounting device used to analyze transactions and how accounting balances are changed?” T Account A list of accounts used by a business is called? “Chart of Accounts”. What is the left side of the Accounting Equation called? Assets What is the right side of the Accounting Equation called? Equities: Liabilities and Owner’s Equity 2 LESSON 2-2

4. CENTURY 21 ACCOUNTING © Thomson/South-Western True or False: Transactions: Must change the balances of at least two accounts True Each transaction must have one debit and one credit? True Debits do not need to = credits for each transaction False 3 LESSON 2-3

5. CENTURY 21 ACCOUNTING © Thomson/South-Western Review Continued Is the normal balance of an asset account a debit or credit? Does it increase or decrease? Debit Is the “Normal Balance” of a liability account a debit or credit? Credit The side of the T account that is always increased is called? Normal Balance 4 LESSON 2-2

6. CENTURY 21 ACCOUNTING © Thomson/South-Western Review Assets What are the 4 Asset accounts we learned thus far? Cash, Prepaid Insurance, Supplies and Accounts Receivables: If you paid Cash, does the balance decrease (you have less) or does it increase (you have more)? It would decrease, you spent money, you have less Is it a debit or Credit? It is a credit. 5 LESSON 2-3

7. CENTURY 21 ACCOUNTING © Thomson/South-Western Liabilities & Owners Equity What is the one liability account we have discussed Accounts Payables What is the 1 Owner’s Equity Account we have discussed? Capital What side of the T account does the balance increase for a liability? What about the Capital? Right If you paid on account, does Accounts payable decrease (you owe less) or does it increase (you owe more)? Is it a debit or Credit? It would decrease, you paid your account, so you owe less It is a debit. 6 LESSON 2-3

8. CENTURY 21 ACCOUNTING © Thomson/South-Western Owner’s Equity What Account is considered Owner’s equity? What four types of transactions impact this account? Investments Revenue (sales for cash; sales on account) Expenses (costs to operating the business/ no $$ value Withdrawal (owner take assets for personal use) 7 LESSON 2-3 Capital

9. CENTURY 21 ACCOUNTING © Thomson/South-Western Owner’s Equity What four types of transactions impact this account? Investments, Revenue, Expenses, and withdrawals 8 LESSON 2-3 Capital, Kim Parker DR  CR  2000250 8501000 600850 Which transaction is a withdrawal for personal use? Which transaction is Sales? Which transaction is an Investment?

10. CENTURY 21 ACCOUNTING © Thomson/South-Western DIVIDE INTO INDIVIDUAL ACCOUNTS LESSON 2-3 Owner’s Equity Capital Income Summary Businesses must track each of the four transaction types in separate accounts (still considered OE accounts)

11. CENTURY 21 ACCOUNTING © Thomson/South-Western Capital Account Capital Account remains the account to track any investments by the owner Drawing, Sales and Expenses are moved out of the Capital account and tracked separately 10 LESSON 2-3

12. CENTURY 21 ACCOUNTING © Thomson/South-Western DIVIDE INTO INDIVIDUAL ACCOUNTS LESSON 2-3 Owner’s Equity Capital Income Summary Drawing Account Revenue Sales Expenses Rent ExpenseMiscellaneousAdvertising Insurance Exp. Supplies ExpUtilities Exp. LeftRight

13. CENTURY 21 ACCOUNTING © Thomson/South-Western Sales Account Expenses and Sales are moved to a “division” outside the equation as they are not permanent accounts Income Summary Division Still a division of OE technically Sales account on right side of Income summary - has a normal balance of what? Increases on what side? Credit Side Decreases on what side? Debit Side 12 LESSON 2-3 Income Summary LeftRight

14. CENTURY 21 ACCOUNTING © Thomson/South-Western 13 LESSON 2-3 RECEIVED CASH FROM SALES page 38 August 12. Received cash from sales, $295.00. 33 2. How is each account classified? 3. Where is the normal balance? 1. Which accounts are affected? Income Summary LeftRight Sales Cash & Sales Cash = Assets Sales = OE Cash increases as a debit, Sales increases as credit

15. CENTURY 21 ACCOUNTING © Thomson/South-Western 14 LESSON 2-3 SALES ON ACCOUNT page 38 33 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? August 12. Sold services on account to Oakdale School, $350.00. 4. How is each classification changed? Income Summary LeftRight Sales Accts. Receivable & Sales Accts. Receivable = Assets Sales = OE Accts. Rec. = increases, Sales = increases Accts. Rec.= debit, Sales = credit

16. CENTURY 21 ACCOUNTING © Thomson/South-Western Expenses – A different Beast 15 LESSON 2-3

17. CENTURY 21 ACCOUNTING © Thomson/South-Western Expense Accounts Expense payments are moved from OE and tracked in the appropriate Expense account Falls under a “division” outside the equation (still OE) Income Summary Division Expense accounts are on the left of Income summary Normal Balance on what side? Increases on what side? Decreases on what side? Increases the amount you paid this year for that expense (not what you owe) 16 LESSON 2-3 Debit Credit Debit

18. CENTURY 21 ACCOUNTING © Thomson/South-Western 17 LESSON 2-3 RECEIVED CASH FROM SALES page 38 1. Which accounts are changed? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 33 Income Summary LeftRight Rent Exp: August 12. Paid cash for rent, $300.00. PAID CASH FOR AN EXPENSE

19. CENTURY 21 ACCOUNTING © Thomson/South-Western Expenses Expenses decrease owners equity To avoid a capital account with a large # of entries, they have their own accounts Expenses = rent, equipment repairs, advertising, miscellaneous, utilities, and charitable contributions. Utilities: Telephone Heat Electricity Water, garbage and sewer 18 LESSON 2-3

20. CENTURY 21 ACCOUNTING © Thomson/South-Western Drawing Account Withdrawal payments are moved from OE and tracked in the Drawing account Tracks the amount you paid this year to the owner so always increases. Drawing account is on left side of Income Summary, what is the normal balance? Normal Balance Debit Increases on what side? Debit Decreases on what side? Credit 19 LESSON 2-3

21. CENTURY 21 ACCOUNTING © Thomson/South-Western 20 page 38 1. Which accounts are affected? 2. How is each account classified? 3. How is each classification changed? 4. How is each amount entered in the accounts? 33 August 12. Paid cash to owner for personal use, $125.00. PAID CASH TO OWNER FOR PERSONAL USE Income Summary LeftRight Drawing, Kim Parker:

22. CENTURY 21 ACCOUNTING © Thomson/South-Western 21 LESSON 2-3

23. CENTURY 21 ACCOUNTING © Thomson/South-Western 22 LESSON 2-3

24. CENTURY 21 ACCOUNTING © Thomson/South-Western WORK TOGETHER 2-3 23 LESSON 2-3