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Chapter 2

Chapter 2. T-accounts, Debits and Credits, Trial Balance, Financial Statements. T-accounts. Used instead of columns for each account T-account form One side of T: record increases to account (+) One side of T: record decreases to account (-) Add up each side of the T

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Chapter 2

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  1. Chapter 2 T-accounts, Debits and Credits, Trial Balance, Financial Statements

  2. T-accounts • Used instead of columns for each account • T-account form • One side of T: record increases to account (+) • One side of T: record decreases to account (-) • Add up each side of the T • Totals called “footings” • The difference between the two footings is balance • Balance is place on the side of the T with larger footing

  3. Normal Balance • Should be the side of the T where increases are shown • Normal Balance side of the T depends on classification of account

  4. Accounting Language Instead of saying increase (+) or decrease (-), Accountants use the terms “debit” and “credit”

  5. T-account Account title Left side Right side Debit side Credit side Dr. Cr.

  6. Accounting Language • The account classification: • Determines whether the account should have a normal balance of Debit or Credit • Determines if the account is increased with a Debit or Credit

  7. Accounting language • Assets, Expenses: normal balance = Dr. • Liabilities, Owner’s Equity, Revenues: normal balance = Cr. • To increase an account, go in the same direction as normal balance • To decrease an account, go in the opposite direction of normal balance

  8. VERY IMPORTANT DEBITS = CREDITS When an amount is placed on the debit side of a T-account, an equal amount must be placed on the credit side of another T-account REMEMBER: Accounting is a DOUBLE entry system!!

  9. Normal Balance Rules: Assets: Normal balance = Debit + = Debit - = Credit Liabilities: Normal balance = Credit + = Credit - = Debit Owner’s Equity: Normal balance = Credit + = Credit - = Debit Revenue: Normal balance = Credit + = Credit - = Debit Expenses: Normal balance = Debit + = Debit - = Credit

  10. Normal Balance Assets Liabilities Owner’s Equity Revenues Expenses Dr Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + - + + -

  11. Normal Balance Owner’s Equity broken down into Capital and Drawing accounts Capital Drawing Dr. Cr. Dr. Cr. - + + -

  12. Recording business transactions in T-accounts • Decide which accounts are involved • Classify accounts involved • Decide if accounts involved + or – • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  13. Recording business transactions Owner invests $10,000 in business • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  14. Recording business transactions Company buys equipment with cash, $3,000 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  15. Recording business transactions Company buys equipment on account, $1,500 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  16. Recording business transactions Company pays creditor on account, $800 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  17. Recording business transactions Owner invests equipment with a $5,000 fair market value in business • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  18. Recording business transactions Sold computer repair services for cash, $1,200 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  19. Recording business transactions Paid rent, $1,800 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  20. Recording business transactions Buy supplies on credit, $150 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  21. Recording business transactions Paid for insurance, $1,200 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  22. Recording business transactions Receive bill for an expense to be paid later ComEd bill, $450, to be paid in 2 weeks • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  23. Recording business transactions Sell services on account, $1,500 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  24. Recording business transactions Receive payment on account from customer, $1,000 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  25. Recording business transactions Paid wages in cash, $250 • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  26. Recording business transactions Buy $4,000 of equipment on account with $1,000 cash down payment Compound entry: more than one debit or more than one credit • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  27. Recording business transactions Owner makes a cash withdrawal for personal use, $1,000 withdrawal: opposite of investment; decreases Owner’s Equity • What accounts are involved? • What are classification of accounts (i.e. Asset, Liability, Owner’s Equity) • Are accounts increased or decreased? • Translate + and – into Dr. and Cr. • Make sure Dr. = Cr. and Accounting Equation still balances

  28. Determine balance of account • Total the Dr. side of the T-account • Record footing • Total the Cr. side of the T-account • Record footing • Subtract footings to get balance • Balance goes on the side of the T with the larger footing

  29. Trial Balance • Statement showing the account balances in 2 column format: Dr. column and Cr. Column • Prepared to verify that total of Dr. balances = total of Cr. balances • List accounts in same order as chart of accounts: Assets, Liabilities, Owner’s Equity (Capital, Drawing) Revenue, Expense • Assets are listed in order of liquidity • Cash, Accounts Receivable, Prepaid Insurance, Equipment

  30. Trial Balance • Next to account name, put the account balance in one of the columns • If the account has a debit balance, put it in the first column • If the account has a credit balance, put it in the second column • Total the columns • The debit column should equal the credit column

  31. Financial Statements • Summarize financial affairs of business • Heading: Name of company Title of financial statement Period of time covered OR date

  32. Financial Statements • Formatting • Place $ at head of each column • Place $ with totals • Single line shows amounts added or subtracted • Double line drawn under column total • Put list of items being added together in an indented column

  33. Financial Statements • Are interconnected • Need to be prepared in order: • Income statement • Statement of owner’s equity • Balance sheet • Information from the income statement is needed to prepare the statement of owner’s equity, info from the statement of owner’s equity is needed to prepare balance sheet

  34. Income Statement Shows how business performed over a period of time 3rd line of heading: For the period ended ……

  35. Income Statement Revenues • Expenses Net income (net loss) If revenues are higher than expenses: Net income If expenses are higher than revenues: Net loss

  36. Statement of Owner’s Equity • Shows changes to Capital account over a period of time • 3rd line of heading: For the period ended ...

  37. Statement of Owner’s Equity Owner, capital at beginning of period + Investments + Net income (amount comes from Income Statement) Subtotal Less: withdrawals Owner, capital at end of period

  38. Balance Sheet • Shows financial position as of a specific date • Lists : Assets Liabilities Owner’s equity (capital account balance comes from Statement of Owner’s Equity) Total assets must equal total liabilities and owner’s equity

  39. Errors exposed by trial balance • Errors in adding trial balance columns • Math error in finding account balances • Record a debit without a credit, vice versa • Recording amount incorrectly

  40. Locate errors on trial balance • If the debit column doesn’t equal the credit column, subtract to find the amount that you are off by • Look to see if one of the accounts has a balance equal to the amount you are off • You may have omitted an account • Divide the amount you are off by 2 and look to see if an account balance is this amount • You may have put the account balance in the wrong column • See if the amount is divisible by 9 • You could have transposed # or slid the decimal point

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