Chapter Two

1. Chapter Two T Accounts, Debits and Credits, Trial Balance, and Financial Statements

2. Performance Objectives • Determine balances of T accounts having entries recorded on both sides of the accounts • Present the fundamental accounting equation with the T account form, and label the debit and credit sides • Record directly in T accounts a group of business transactions involving changes in asset, liability, owner’s equity, revenue, and expense accounts for a service business Accounting Is Fun!

3. Performance Objectives • Prepare a trial balance • Prepare: • Income statement • Statement of owner’s equity • Balance sheet • Recognize the effect of transpositions and slides on account balances Accounting Is Fun!

4. T Account Form Shaped like the letter T One side for increases (+) to the account The other side for decreases (-) to the account Normal Balance The increase (plus) side of any T account. 34,120 Accounting Is Fun!

5. Compare Account Column to T Account 34,120 Accounting Is Fun!

6. Debit & Credit What does Debit mean? Forget what you know about debit cards! What does Credit mean? Forget what you know about credit cards! Accounting Is Fun!

7. In Accounting Debit = Left Debit = DR = Left Credit = Right Credit = CR = Right Accounting Is Fun!

8. T Accounts • Assets • The plus side for assets is placed on the left, and the minus side is placed on the right Accounting Is Fun!

9. T Accounts • Liabilities and owner’s equity • Since these classifications are placed on the opposite side of the equals sign, the plus and minus signs are also placed on the opposite sides (switched around) Accounting Is Fun!

10. In Accounting • Debit is Left • Credit is Right • DR is Left • CR is Right • For every account this is true! Accounting Is Fun!

11. T Accounts • Recall that we placed revenue and expenses under the umbrella of owner’s equity • Revenue increases owner’s equity • Expenses decrease owner’s equity • Remember: • Drawing is placed under the umbrella of the Capital account Accounting Is Fun!

12. Present The Fundamental Accounting Equation With The T Account Form, And Label The Debit And Credit Sides As Well As The Plus And Minus Sides • We switch the plus and minus signs around on the other side of the equals sign so that we will be able to carry out double-entry accounting • Whenever there is a minus in front of the account, we must “switch the plus & minus around” Accounting Is Fun!

13. Debits Must Always Equal CreditsDR = CR The critical rule to remember is that the amount placed on the debit side of one or more accounts MUST equal that amount placed on the credit side of another account or accounts. Accounting Is Fun!

14. Record Directly In T Accounts A Group Of Business Transactions Involving Changes In Asset, Liability, Owner’s Equity, Revenue, And Expense Accounts For A Service Business Step 1 Which accounts are involved? Step 2 How should you classify the accounts? Asset Liability Capital Revenue Expenses Step 3 Are the accounts increased or decreased? Step 4 Which accounts are debited and which accounts are credited? Step 5 Balance the equations: DR = CR A = L + OE Accounting Is Fun!

15. Recording Business Transactions for a Service Business We will be recording business transactions for a company with the following details: Owner name: L. P. Arch Business name: Arch Copy Co. Business type: Sole proprietorship (one-person business) Accounting Is Fun!

16. Transaction (a): Arch deposited $70,000 in a bank account in name of business. Accounting Is Fun!

17. Transaction (b): Bought equipment, paying cash, $33,000. Accounting Is Fun!

18. Transaction (c): Bought equipment on account from Melton Office Supply, $7,000. Accounting Is Fun!

19. Transaction (d): Paid Melton Office Supply, a creditor, $2,000. Accounting Is Fun!

20. Transaction (e): Arch invested her personal computer equipment having a fair market value of $6,200 in Arch Copy Co. Accounting Is Fun!

21. Transaction (f): Arch Copy Co. sold services for cash, $2,520. Accounting Is Fun!

22. Transaction (g): Paid rent for the month, $700. Accounting Is Fun!

23. Transaction (h): Bought supplies (toner and paper) on credit. These supplies are used immediately; therefore, they are recorded as an expense ($600). Accounting Is Fun!

24. Transaction (i): Arch Copy Co. paid $360 for a one-year liability insurance policy. Accounting Is Fun!

25. Transaction (j): Received bill for newspaper advertising, $200. Accounting Is Fun!

26. Transaction (k): Arch Copy Co. completed a printing job and billed Walker Company $1,050 for services performed. Accounting Is Fun!

27. Transaction (l): Arch Copy Co. paid $1,800 to Melton Office Supply, its creditor, as part payment on account. Accounting Is Fun!

28. Transaction (m): Arch Copy Co. received and paid electric bill, $160. Accounting Is Fun!

29. Transaction (n): Arch Copy Co. paid on account $200 to City News for advertising. Accounting Is Fun!

30. Transaction (o): Arch Copy Co. paid wages of a part-time employee, $2,130. Accounting Is Fun!

31. Transaction (p): Bought additional equipment from Melton Office Supply, $3,520, paying $620 down with the remaining $2,900 on account. Accounting Is Fun!

32. Transaction (q): Arch Copy Co. received $850 cash on account from a credit customer. Accounting Is Fun!

33. Transaction (r): Arch Copy Co. received revenue from cash customers for the rest of the month, $4,220. Accounting Is Fun!

34. Transaction (s): Arch withdrew $2,500 in cash from the business for her personal use. Accounting Is Fun!

35. Footing Accounting Is Fun!

36. Balances Accounting Is Fun!

37. Performance Objective 5 Prepare a trial balance Accounting Is Fun!

38. Prepare a Trial Balance • List the account balances in two columns • Left column = Debits • Right column = Credits • List the accounts in the same order as the chart of accounts • First the balance sheet accounts • Then the income statement accounts Accounting Is Fun!

39. Trial Balance A trial run to prove that DR = CR If DR = CR, then A = L + OE Accounting Is Fun!

40. Trial Balance Not a financial statement Don’t use dollar signs Use a single underline under the list of figures to be added Use a double underline under column totals Accounting Is Fun!

41. Accounting Process of: • Analyzing • Classifying • Recording • Summarizing • Interpreting business transactions Summarizing means preparing financial statements Accounting Is Fun!

42. Performance Objective 6 Prepare • Income statement • Statement of owner’s equity • Balance sheet Accounting Is Fun!

43. All Financial Statements • Summarize useful financial information for users of accounting information: • Owners/investors • Managers • Creditors • Government agencies Accounting Is Fun!

44. All Financial Statements • Have a three-line title • Who: Name of the company (or owner) • What: Title of financial statement • When: Period of time or a single date Income Statement Or Statement of OE Balance Sheet Accounting Is Fun!

45. Income Statement Total Revenue – Total Expenses = Net Income (or Net Loss) Accounting Is Fun!

46. Income Statement Answers the questions How profitable was the company over the past period? How much net income did the entity earn? Revenues– ExpensesNet Income Accounting Is Fun!

47. What the Income Statement Tells Us Is the business profitable? What is the net income? Revenue > Expenses What is the net loss? Expenses > Revenue Accounting Is Fun!

48. Income Statement • Income Statement—Also Known As • Statement of income and expenses • Profit and loss statement • Results of operations • Net Income—Also Known As • Profit • Earnings Accounting Is Fun!

49. Net Income Use the net income figure on the income statement to complete the statement of owner’s equity Accounting Is Fun!

50. Statement of Owner’s Equity Prepared after you finish the income statement Answers the questions How did the owner’s equity change over the last period? How and why did the Capital account change? Provides ending Capital amount for use on the balance sheet 00 Accounting Is Fun!