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Skyline College

Chapter. 3. Skyline College. The Accounting Equation. ASSETS The property a business owns. LIABILITIES The debts of the business. =. +. OWNER’S EQUITY The owner’s financial interest in the business. Advantages of Accounts. Accounts help to: analyze, record, classify,

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Skyline College

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  1. Chapter 3 Skyline College

  2. The Accounting Equation ASSETS The property a business owns LIABILITIES The debts of the business = + OWNER’S EQUITY The owner’s financial interest in the business

  3. Advantages of Accounts Accounts help to: • analyze, • record, • classify, • summarize, • and report financial information.

  4. Classification is a means of identifying each account: asset, liability, or owner’s equity. Classification of Accounts • Asset Accounts Asset accounts show the property a business owns. • Liability Accounts Liability accounts show the debts of the business. • Owner’s Equity Accounts Owner’s equity accounts show the owner’s financial interest in the business.

  5. A T account is a type of diagram, used to analyze the effects of a business transaction. T Accounts = + ASSETS LIABILITIES OWNER’S EQUITY + Record Increases LEFT SIDE - Record Decreases RIGHT SIDE - Record Decreases LEFT SIDE + Record Increases RIGHT SIDE - Record Decreases LEFT SIDE + Record Increases RIGHT SIDE

  6. Asset Account • Cash is an asset. • Assets appear on the left side of the accounting equation. • Cash increases appear on the left side of the Cash T account. • Decreases are shown on the right side. Cash +Record Increases LEFT SIDE - Record Decreases RIGHT SIDE

  7. Liabilities & Capital Accounts • Capital is an owner’s equity account. • Owner’s equity appears on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). • Increases appear on the right side of the T account. • Decreases appear on the left side. Jason Taylor, Capital - Record Decreases LEFT SIDE + Record Increases RIGHT SIDE

  8. Effects of Business Transactions Use these steps to analyze the effects of the business transactions: • Analyze the financial event. • Identify the accounts affected. • Classify the accounts affected. • Determine the amount of increase or decrease for each account. • Apply the left-right rules for each account affected. • Make the entry in T-account form.

  9. Business Transaction Jason Taylor withdrew $90,000 from personal savings and deposited it in the new business checking account for JT’s Consulting Services. Analysis: (a) The asset account, Cash, is increased by $90,000. (a) The owner’s equity account, Jason Taylor, Capital, is increased by $90,000.

  10. Record increases + Record increases + Left-Right Rules • LEFT Increases to asset accounts are recorded on the left side of the T account. • RIGHT Increases to owner’s equity accounts are recorded on the right side of the T account. ASSETS OWNER’S EQUITY

  11. T-Account Presentation Which T account has an entry on the left? Which T account has an entry on the right? For what amount? For what amount?

  12. T-Account Presentation Cash Jason Taylor, Capital + (a) 90,000 + (a) 90,000

  13. Business Transaction Record a cash purchase of Equipment JT’s Consulting Services issued a $10,000 check to purchase a computer and other equipment. Analysis: (b) The asset account, Equipment, is increased by $10,000. (b) The asset account, Cash, is decreased by $10,000.

  14. Left-Right Rules • LEFT Increases to asset accounts are recorded on the left side of the T account. • RIGHT Decreases to asset accounts are recorded on the right side of the T account. ASSETS ASSETS Record increases + Record decreases -

  15. T-Account Presentation Which T account has an entry on the left? Which T account has an entry on the right? For what amount? For what amount?

  16. T-Account Presentation Equipment Cash + (b) 10,000 - (b) 10,000

  17. Reviewing the Effects of the Transactions Equipment Cash + (b) 10,000 + (a) 90,000 - (b) 10,000 • The Cash account shows two transactions. • The initial investment by the owner (a) • The cash purchase of equipment (b)

  18. Liabilities • Recall that when a purchase is made on account, a liability is created. • Liabilities are amounts a business owes its creditors. • They appear on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity).

  19. Business Transaction Recording a Credit Purchase of Equipment The firm bought office equipment for $12,000 on account from Office Plus. Analysis: (c) The asset account, Equipment, is increased by $12,000. (c) The liability account, Accounts Payable, is increased by $12,000.

  20. Left-Right Rules • LEFT Increases to asset accounts are recorded on the left side of the T account. • RIGHT Increases to liability accounts are recorded on the right side of the T account. LIABILITY ASSETS Record increases + Record increases +

  21. T-Account Presentation Which T account has an entry on the left? Which T account has an entry on the right? For what amount? For what amount?

  22. T-Account Presentation Equipment Accounts Payable + (c) 12,000 + (c) 12,000

  23. Reviewing the Effects of the Transactions Equipment Accounts Payable + (b) 10,000 + (c) 12,000 (c) 12,000 • The Equipment account shows two transactions. • The purchase of equipment for cash (b) • The purchase of equipment on credit (c)

  24. Business Transaction Recording a Cash Purchase of Supplies JT’s Consulting Services issued a check for $3,000 to Office Supplies Inc. to purchase office supplies. Analysis: (d) The asset account, Supplies, is increased by $3,000. (d) The asset account, Cash, is decreased by $3,000.

  25. Left-Right Rules • LEFT Increases to asset accounts are recorded on the left side of the T account. • RIGHT Decreases to asset accounts are recorded on the right side of the T account. ASSETS ASSETS Record increases + Record decreases -

  26. T-Account Presentation Which T account has an entry on the left? Which T account has an entry on the right? For what amount? For what amount?

  27. T-Account Presentation Supplies Cash + (d) 3,000 - (d) 3,000

  28. Reviewing the Effects of the Transactions Supplies Cash + (d) 3,000 + (a) 90,000 - (b) 10,000 (d) 3,000 • The Cash account shows three transactions: • The initial investment by the owner (a) • The cash purchase of equipment (b) • The cash purchase of supplies (d)

  29. Business Transaction Recording a Payment to a Creditor JT’s Consulting Services issued a check in the amount of $5,000 to Office Plus. Analysis: (e) The asset account, Cash, is decreased by $5,000. (e) The liability account, Accounts Payable, is decreased by $5,000.

  30. Left-Right Rules • LEFT Decreases to liability accounts are recorded on the left side of the T account. • RIGHT Decreases to asset accounts are recorded on the right side of the T account. LIABILITY ASSETS Record decreases - Record decreases -

  31. T-Account Presentation Which T account has an entry on the left? Which T account has an entry on the right? For what amount? For what amount?

  32. T-Account Presentation Accounts Payable Cash - (e) 5,000 - (e) 5,000

  33. (d) 10,000 (h) 3,000 (i) 5,000 Reviewing the Effects of the Transactions Cash Accounts Payable - - (e) 5,000 + (b) 12,000 + (a) 90,000 The Cash account shows four transactions: • Initial investment (a) • Equipment purchase (b) • Supplies purchase (d) • Payment on account (e)

  34. (b) 10,000 (d) 3,000 (e) 5,000 Reviewing the Effects of the Transactions Cash Accounts Payable - + (a) 90,000 - (e)5,000 + (c)12,000 The Accounts Payable account shows two transactions: • Credit purchase of equipment (c) • Payment to creditor (e)

  35. Business Transactions Recording Prepaid Rent JT’s Consulting Services issued a check for $7,000 to pay rent for the months of December and January. Analysis: (f) The asset account, Prepaid Rent, is increased by $7,000. (f) The asset account, Cash, is decreased by $7,000.

  36. Left-Right Rules • LEFT Increases to asset accounts are recorded on the left side of the T account. • RIGHT Decreases to asset accounts are recorded on the right side of the T account. ASSETS ASSETS Record increases + Record decreases -

  37. T-Account Presentation Which T account has an entry on the left? Which T account has an entry on the right? For what amount? For what amount?

  38. T-Account Presentation Prepaid Rent Cash + (f) 7,000 - (f) 7,000

  39. Reviewing the Effects of the Transactions Prepaid Rent Cash - (b) 10,000 (d) 3,000 (e) 5,000 (f) 7,000 + (f) 7,000 + (a) 90,000 • The Cash account shows five transactions: • Initial investment (a) • Equipment purchase (b) • Supplies purchase (d) • Payment on account (e) • Advance rent payment (f)

  40. An account balance is the difference between the amounts recorded on the two sides of an account. Account Balances

  41. Calculating the Account Balance • Compute the totals of each side of the T account. • Subtract the smaller total from the larger total. The result is the account balance.

  42. Recording Account Balances THEN IF the total on the right side is larger than the total on the left side, the balance is recorded on the right side. the total on the left side is larger, the balance is recorded on the left side. an account shows only one amount, that amount is the balance. an account contains entries on only one side, the total of those entries is the account balance.

  43. Bal. 65,000 Account Balance Cash + (a) 90,000 - (b) 10,000 (d) 3,000 (e) 5,000 (f) 7,000 90,000 25,000 (90,000 – 25,000 = 65,000)

  44. ASSETS = LIABILITIES + OWNER’S EQUITY Cash Accounts Payable Jason Taylor, Capital (a) 90,000 (b) 10,000 (e) 5,000 (c) 12,000 (a) 90,000 (d) 3,000 (e) 5,000 Bal. 7,000 Bal 90,000 (f) 7,000 Bal. 65,000 Supplies SUMMARY OF ACCOUNT BALANCES (d) 3,000 ASSETS = LIABILITIES + OWNER’S EQUITY Bal 3,000 Prepaid Rent 65,000 7,000 90,000 3,000 (f) 7,000 7,000 Bal 7,000 22,000 Equipment 97,000 = 7,000 + 90,000 (b) 10,000 (c) 12,000 Bal. 22,000 Account balances for Carter Consulting Services

  45. Revenue and Expense Accounts • Some owner’s equity accounts are classified as: • Revenue • Expense • Separate accounts are used to record revenue and expense transactions.

  46. Owner’s Equity Revenue Increase Side Decrease Side Decrease Side Increase Side • Revenues increase owner’s equity. • Increases in owner’s equity appear on the right side of the T account. • Therefore, increases in revenue appear on the right side of revenue T accounts.

  47. Revenue Increase Side + Decrease Side - The right side of the revenue account shows increases and the left side shows decreases. Decreases in revenue accounts are rare but might occur because of corrections or transfers.

  48. JT’s Consulting Services During December the business earned $26,000 in revenue from clients who paid cash for bookkeeping, accounting, and consulting services. 3-48

  49. JT’s Consulting Services Which account is credited? Which account is debited? For what amount? For what amount?

  50. + (g) 26,000 Reviewing the Effects of the Transactions Cash Fees Income + Bal. 65,000(g) 26,000 $26,000 (g) is entered on the left (increase) side of the asset account Cash. $26,000 (g) is entered on the right side of the Fees Income account. 3-50

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