THE ACCOUNTING PUZZLE

1. THE ACCOUNTING PUZZLE Learning accounting is like trying to put together a 1,000 piece puzzle without the benefit of the picture on the front of the box. To rectify this problem we have created the “picture” for accounting. Refer to this picture every time you analyze a business transaction. Use the Page Down key to advance through the presentation and the Page Up key to go back a step. PARACCOUNTANT Association of Canada

2. Before we begin we’ll have a short quiz. Press the Page Down key to reveal the question, decide on an answer and then press the Page Down key to reveal the answer. Which is better, a Debit or a Credit? Neither!! They are opposites to each other just like left and right, up and down, in and out, positive and negative. 2 + 3 x 4 = ? 2 + 3 x 4 = 14 (Order of Operations) Multiplication and Division before Addition and Subtraction PARACCOUNTANT Association of Canada

3. The purpose of the first question was to dispel any preconceived notions that a Debit is better than a Credit or a Credit is better than a Debit. They are only a way of causing an amount to go up or an amount to go down. If an account has a Debit balance, a Debit entry will make it go up and a Credit entry will make it go down. If an account has a Credit balance, a Credit entry will make it go up and a Debit entry will make it go down. Now let’s look at the Accounting Puzzle PARACCOUNTANT Association of Canada

4. Assets (Things you own) PARACCOUNTANT Association of Canada

5. Assets • Cash in Bank • Accounts Receivable • Vehicle • Equipment PARACCOUNTANT Association of Canada

6. Assets Liabilities (Money you owe) • Cash in Bank • Accounts Receivable • Vehicle • Equipment PARACCOUNTANT Association of Canada

7. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan PARACCOUNTANT Association of Canada

8. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan Equity (Net worth) PARACCOUNTANT Association of Canada

9. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan Equity • Owner Capital PARACCOUNTANT Association of Canada

10. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan Equity • Owner Capital Revenue (Earnings) PARACCOUNTANT Association of Canada

11. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan Equity • Owner Capital Revenue • Bookkeeping Fees Earned • Consulting Fees Earned PARACCOUNTANT Association of Canada

12. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan Equity • Owner Capital Expenses Revenue (Costs Incurred) • Bookkeeping Fees Earned • Consulting Fees Earned PARACCOUNTANT Association of Canada

13. Assets Liabilities • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan Equity • Owner Capital Expenses Revenue • Advertising • Bank Charges • Vehicle Expense • Bookkeeping Fees Earned • Consulting Fees Earned PARACCOUNTANT Association of Canada

14. DEBIT BALANCE CREDIT BALANCE • Debit increases the balance • Credit decreases the balance • Credit increases the balance • Debit decreases the balance Assets Liabilities Balance Sheet • Cash in Bank • Accounts Receivable • Vehicle • Equipment • Accounts Payable • Bank Loan The balance in these accounts at a specific point in time (ie: December 31) Equity • Owner Capital Assets = Liabilities + Equity Expenses Revenue Income Statement • Advertising • Bank Charges • Vehicle Expense • Bookkeeping Fees Earned • Consulting Fees Earned The accumulated change in these accounts over a period of time (ie: month or year) Revenue – Expenses = Net Income TOTAL DEBITS = TOTAL CREDITS PARACCOUNTANT Association of Canada

15. Only memorization will help you remember where an account belongs in the puzzle (account type: Asset, Liability, Equity, Revenue or Expense) and whether an account’s normal balance is a Debit or a Credit. To help you practice the following screen will test you. Do the following: • Press the Page Down key to reveal the Account Name. • Decide what the Account Type should be. • Press the Page Down key to reveal the Account Type. • Decide what the Normal Balance should be. • Press the Page Down key to reveal the Normal Balance. • Practice this test until you get 100%. PARACCOUNTANT Association of Canada

16. ACCOUNT NAME ACCOUNT TYPE NORMAL BALANCE Accounts Payable Liability Credit Accounts Receivable Asset Debit Bookkeeping Fees Earned Revenue Credit Advertising Expense Expense Debit Cash in Bank Asset Debit Bank Charges Expense Debit Vehicle Asset Debit Bank Loan Liability Credit Consulting Fees Earned Revenue Credit Owner’s Capital Equity Credit Vehicle Expense Expense Debit Equipment Asset Debit If you did not get 100% on this test, use the Page Up key to return to the Puzzle and try again!!! PARACCOUNTANT Association of Canada

17. CONGRATULATIONS!! If you are looking at this screen you have passed the test 100% error free. We stress this because the Account Names, Types and Normal Balances are used again and again. In fact, the puzzle is the foundation on which all your future accounting lessons are built. Make sure that foundation is strong!!! PARACCOUNTANT Association of Canada

18. Business Transactions and T-Accounts To illustrate the effect of business transactions on the different accounts we post “General Journal Entries to “T-Accounts”. Just as you may keep a “Diary” or “Journal” to record the day’s events, in bookkeeping we keep a journal to record any business transactions. There are five main components to a “General Journal Entry”, the Date, Account, Type, Amount and Explanation. The following is a General Journal Entry to record the receipt, by the business, of $50,000 from the Owner. Notice that total Debits = total Credits PARACCOUNTANT Association of Canada

19. “T-Accounts” represent “Ledger Cards”. The left side of the “T-Account” is used to enter Debit amounts. The right side of the “T-Account” is used to enter Credit amounts as follows: Cash in Bank DEBITS CREDITS We will now create several General Journal Entries and post them to “T-Accounts” to see, over time, what the effects will be on the General Ledger Accounts. The following screen shows the T-Accounts we will use for this exercise. PARACCOUNTANT Association of Canada

20. Cash in Bank Equipment Owner Capital Advertising Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges Vehicle Bank Loan Consulting Fees Vehicle Expense PARACCOUNTANT Association of Canada

21. An investment of $50,000 to the business from the owner. PARACCOUNTANT Association of Canada

22. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges Vehicle Bank Loan Consulting Fees Vehicle Expense PARACCOUNTANT Association of Canada

23. The business purchases an automobile for $20,000. PARACCOUNTANT Association of Canada

24. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 20,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 PARACCOUNTANT Association of Canada

25. The business purchases Office Equipment for $1,000. PARACCOUNTANT Association of Canada

26. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 20,000 1,000 1,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 PARACCOUNTANT Association of Canada

27. The business purchases $500 worth of Advertising on account and will pay for it later. PARACCOUNTANT Association of Canada

28. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 500 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 PARACCOUNTANT Association of Canada

29. The business earns $2,000 in consulting fees and sends the bill to the client who will pay later. PARACCOUNTANT Association of Canada

30. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 2,000 PARACCOUNTANT Association of Canada

31. The business purchases $100 worth of Gas for the vehicle on account and will pay for it later. PARACCOUNTANT Association of Canada

32. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 100 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 2,000 100 PARACCOUNTANT Association of Canada

33. The business earns $1,500 in bookkeeping fees and sends the bill to the client who will pay later. PARACCOUNTANT Association of Canada

34. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 1,500 100 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 2,000 100 PARACCOUNTANT Association of Canada

35. The business borrows $1,500 from the bank PARACCOUNTANT Association of Canada

36. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 1,500 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 1,500 100 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 1,500 2,000 100 PARACCOUNTANT Association of Canada

37. Received the $2,000 for the consulting fees earned and billed on the January 10th. PARACCOUNTANT Association of Canada

38. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 1,500 2,000 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 1,500 100 2,000 eliminates Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 1,500 2,000 100 PARACCOUNTANT Association of Canada

39. Paid the $500 for the advertising from January 2nd. PARACCOUNTANT Association of Canada

40. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,000 1,500 2,000 500 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 1,500 100 2,000 500 eliminates Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 1,500 2,000 100 PARACCOUNTANT Association of Canada

41. Recorded the $25 bank charge on the statement. PARACCOUNTANT Association of Canada

42. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,500 1,000 2,000 500 25 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 25 1,500 100 2,000 500 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 1,500 2,000 100 PARACCOUNTANT Association of Canada

43. Now that we have completed all the transactions, we need to come up with the total Debits and total Credits for each of the accounts as follows: PARACCOUNTANT Association of Canada

44. Cash in Bank Equipment Owner Capital Advertising 50,000 50,000 500 20,000 1,000 1,500 1,000 2,000 500 25 53,500 21,525 1,000 50,000 500 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 25 1,500 100 2,000 500 3,500 2,000 500 600 1,500 25 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 1,500 2,000 100 20,000 1,500 2,000 100 PARACCOUNTANT Association of Canada

45. For accounts that have an amount for total Debits and an amount for total Credits we must determine whether the final balance is a Debit balance or a Credit balance. We do this by subtracting the smaller amount from the larger amount which will leave the amount on the correct side of the “T” as follows: PARACCOUNTANT Association of Canada

46. Cash in Bank Equipment Owner Capital Advertising 50,000 20,000 1,000 50,000 500 1,500 2,000 500 1,000 25 53,500 21,525 - 21,525 1,000 50,000 500 31,975 Accounts Receivable Accounts Payable Bookkeeping Fees Bank Charges 2,000 500 1,500 25 1,500 100 2,000 500 3,500 2,000 500 600 1,500 25 - 2,000 - 500 1,500 100 Vehicle Bank Loan Consulting Fees Vehicle Expense 20,000 1,500 2,000 100 20,000 1,500 2,000 100 PARACCOUNTANT Association of Canada

47. The next step is to create a “Trial Balance”, using the final amounts for each account, to make sure that total Debits equals total Credits as follows: PARACCOUNTANT Association of Canada

48. TRIAL BALANCE Use the Page Up and then Page Down keys to go back and forth from here to the T-Accounts. PARACCOUNTANT Association of Canada

49. Now that we have confirmed that the total Debits amount equals the total Credits amount we can use the Trial Balance to create three Financial Statements. First, let’s divide the Trial Balance into its components. PARACCOUNTANT Association of Canada

50. TRIAL BALANCE ASSETS LIABILITIES EQUITY REVENUE EXPENSES PARACCOUNTANT Association of Canada