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Chapter 3

Chapter 3. Applying Double-Entry Accounting. LO1. Learning Objective 1 Describe a T-account and its use in recording transactions. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

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Chapter 3

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  1. Chapter 3 Applying Double-Entry Accounting

  2. LO1 Learning Objective 1Describe a T-account and its use in recording transactions. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The general ledger is a record containing all accounts used by the company. Cash Expenses Supplies

  3. An account balance is the difference between the increases and decreases in an account. LO1 Double-Entry Accounting $15,000 – 5,850 = $9,150

  4. LO1 – – + + Owner’s Capital Owner's Withdrawals Revenues Expenses Expanded Accounting Equation Remember we must always consider the accounting equation when recording transactions. = + Assets Liabilities Equity

  5. A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. LO2 Learning Objective 2Define debits and credits and explain their role in double-entry accounting. Account title such as cash or supplies

  6. LO2 = + Assets Liabilities Equity EQUITIES ASSETS LIABILITIES Debit Credit Debit Credit Debit Credit +- -+ -+ Double-Entry Accounting Remember whenever we record a transaction debits will always equal credits.

  7. LO2 _ _ Owner’s Capital Owner's Withdrawals + Revenues Expenses Owner’sCapital Owner's Withdrawals Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit -+ +- -+ +- Double-Entry Accounting Equity Notice that we must always consider the effect that an increase or decrease has on equity.

  8. LO3 Analysis: Assets increase with a debit. Capital increases with a credit. Posting: 301 Learning Objective 3Post transactions in T-accounts.

  9. LO3 Analysis: Assets increase with a debit. Assets decrease with a credit. Posting: Analyzing Transactions

  10. LO3 Analysis: Assets increase with a debit. Liabilities increase with a credit. Posting: Analyzing Transactions

  11. LO4 FastForward Trial Balance December 31, 2010 Cash $ 4,350 Accounts receivable - Supplies 9,720 Prepaid insurance 2,400 Equipment 26,000 Accounts payable $ 6,200 Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total $ 45,300 $ 45,300 Learning Objective 4Prepare and explain the use of a trial balance. • On the trial balance we list all the accounts in our general ledger. • The total of all our debit account balances must equal all our credit account balances. • If this is not the case, we may have made an error posting one or more journal entries into the ledger. • We cannot prepare the financial statement until the books are in balance as determined by the trial balance. Debit Credit

  12. LO5 Learning Objective 5Prepare Financial Statements from a trail Balance • The income statement contains the revenues and expenses from the accounting period. • This information will enable the owner to determine if they had a profit or loss. In this case there was a $3,470 profit.

  13. LO5 Statement of Owner's Equity • We now are able to see how the owner’s equity has changed over the period. • Take the beginning capital then add any investments made by the owner. • Next we add the net income from the period (which we can get from the income statement). • Then subtract any withdrawals the owner had made. • You should now have the new capital balance.

  14. LO5 Balance Sheet • The balance sheet reports the financial position of a company at a particular point in time, usually at the end of a month, quarter or year. • Notice that we get the new capital balance from the statement of owners equity.

  15. End of Chapter 3

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