Transcription

DEBITS AND CREDITS:ANALYZING AND RECORDINGBUSINESS TRANSACTIONSChapter 22-1Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objectives1.2.3.4.2-2Setting up and organizing a chart ofaccounts.Recording transactions in T accountsaccording to the rules of debit and credit.Preparing a trial balance.Preparing financial statements from a trialbalance.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objective 1Setting up and organizing a chartof accounts.2-3Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Account 2-4A business transaction is recorded in theaccounting equation under a specific accountDifferent accounts are used for eachsubdivisions of the accounting equation: Assets Liabilities Equity Expenses RevenuesCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Account Needed Standard account 2-5A way to record the increases and decreasesIn specific account categoriesKeeping them together in one placeFormal account that includes columns for: Date Item Posting reference Debits CreditsCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Account 2-6Accounts have a separate formEach form contains all transactions affecting itAll forms kept together in a ledger (book-like)Each page contains one accountAccount TitleCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Standard AccountAccount Title 2-7All T accounts have this structureLeft side is called debit sideRight side is called credit sideDebit and Credit indicates position onlyCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Balancing an Account The procedure used to balance an account is thesame for all accounts FOOTING 2-8FOOTINGAdd the items listed on the left side and foot (subtotal)Add the items listed on the right side and foot (subtotal)Subtract the smaller number from the larger numberThe result is the account balance, listed on the side with thelarger amount (5,600 – 900 4,700)Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objective 2Recording transactions in T accountsaccording to the rules of debit andcredit.2-9Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Recording Business Transactions:Debits and Credits 2 - 10Learn the rulesNormal balance of an account is the side thatincreasesCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Recording Business Transactions:Debits and Credits 2 - 11The rulesRules for withdrawals and expenses are theopposite of those for capital and revenueCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Balancing the Equation Amount(s) entered on the debit side of oneaccount(s) must be on the credit side of anotheraccount(s)This ensures the accounting equation is inbalance 2 - 12You can have multiple debits with one creditYou can have multiple credits with one debitYou can have multiple debits with multiple creditsDebit totals must equal credit totalsCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Chart of Accounts 2 - 13A numbered list of all of the business' accountsCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

The Transaction Analysis The five steps to analyzing each transactionStep 1 - Determine which accounts are affected. Example: Cash,Accounts Payable, Rent Expense. A transaction alwaysaffects at least two accounts.Step 2 - Determine which categories the accounts belong to: assets,liabilities, capital, withdrawals, revenue, or expenses.Step 3 - Determine whether the accounts increase or decrease.Example: If you receive cash, that account increases.Step 4 - What do the rules of debit and credit say?Step 5 - What does the T account look like?Place amounts into accounts either on the left or right sidedepending on the rules.2 - 14Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

The Transaction Analysis 2 - 15The five-step analysis from another perspectiveDo not try to debit or credit an account until yougo through the first three steps of the transactionanalysisCopyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 16A - August 28: Mia Wong invests 6,000 cashand 200 of office equipment in the business.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Compound EntriesA transaction that involves more thanone debit or more than one credit Example Adebit of 6,000 to Cash and a debitof 200 to Office Equipment for acredit of 6,200 to Mia Wong, Capital 2 - 17The name for this is double-entrybookkeeping.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 18B - Aug. 29: Law practice bought officeequipment for cash, 500.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 19C - Aug. 30: Bought more office equipment onaccount, 300.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 20D - Sept. 1–30: Provided legal services for cash, 2,000.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 21E - Sept. 1–30: Provided legal services onaccount, 3,000.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 22F - Sept. 1–30: Received 900 cash from clientsfor services rendered previously on account.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 23G - Sept. 1–30: Paid salaries expense, 700.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 24H - Sept. 1–30: Paid rent expense, 400.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 25I - Sept. 1–30: Received a bill for AdvertisingExpense (to be paid next month), 200.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Applying the Transaction Analysis 2 - 26J - Sept. 1–30: Wong withdrew cash for personal use, 100.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of Transactions2 - 27Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objective 3Preparing a trial balance.2 - 28Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Trial BalanceList of the ending balances of all theaccounts in a ledger Total debits should equal total credits List in same order as they appear inchart of accounts 2 - 29Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of Transactions2 - 30Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Trial Balance2 - 31Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objective 4Preparing financial statementsfrom a trial balance.2 - 32Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Steps in Preparing FinancialStatements from a Trial Balance 2 - 33When a trial balance is complete, the total of all thedebits must equal the total of all the credits.Income Statement: Once the trial balance is complete,the first report to make is the income statement, which ismade up of only revenue and expense.Statement of Owner’s Equity: The second report toprepare is the statement of owner’s equity, which showshow to calculate a new figure for capital.Balance Sheet: The third report is the balance sheet,which lists out each asset, liability, and the new figurefor capital.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Steps inPreparingFinancialStatementsfrom aTrialBalance2 - 34Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the chapter 2 - 35The chart of accounts aids in locating andidentifying accounts quickly.Remember that the rules of debit and credit onlytell us on which side to place information.Whether the debit or credit represents increasesor decreases depends on the account category:assets, liabilities, capital, and so on. Think of abusiness transaction as an exchange: You getsomething and you give or part with something.A transaction that involves more than one debit ormore than one credit is called a compound entry.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the chapter 2 - 36You will notice that assets, withdrawals, andexpenses increase when you put amounts on theleft, or debit, side of these accounts. Theaccounting system balances because liabilities,capital, and revenue increase when you putamounts on the right, or credit, side of theseaccounts. The increase side of any account willrepresent its normal balance.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the chapter 2 - 37Footings are used to obtain the totals of eachside of every T account that has more than oneentry. The footings are used to find the endingbalance. The ending balances are used toprepare a trial balance. The trial balance is nota financial statement, although it is used toprepare financial statements. The trial balancelists all the accounts with their balances in thesame order as they appear in the chart ofaccounts.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the chapter 2 - 38The trial balance is a list of ending balances ofledger accounts. These balances are used toprepare the three financial reports. Financialreports have no debits or credits. The inside columnsare used to subtotal numbers. Revenue andexpenses go on the income statement. Withdrawalsand either net income or net loss go on the statementof owner’s equity to calculate a new figure forcapital. The balance sheet is a list of assets,liabilities, and the new amount for ending capital.Remember that the trial balance has debit or credits,not the financial reports.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the chapter 2 - 39Once the trial balance is complete, the firststatement to make is the income statement, which ismade up of only revenue and expenses.Remember that there are no debits or credits onfinancial statements. All we are taking are theending balances of each title from the trialbalance. For the income statement, we list fees asthe revenue and then list the expense titles in theinside column. Total operating expenses are thensubtracted from the fees to arrive at a net incomeor a net loss.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Summary of the chapter 2 - 40The second statement to prepare is the statementof owner’s equity, which shows how to calculate anew figure for capital.The third report is the balance sheet, which listsout each asset, liability, and the new figure forcapital.Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Questions2 - 41Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.

CopyrightAll rights reserved. No part of this publication may be reproduced, stored ina retrieval system, or transmitted, in any form or by any means, electronic,mechanical, photocopying, recording, or otherwise, without the prior writtenpermission of the publisher. Printed in the United States of America.2 - 42Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall.