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Chapter 2 Balance Sheet Accounts UNIT 3 Recording Transactions in T-Accounts

Chapter 2 Balance Sheet Accounts UNIT 3 Recording Transactions in T-Accounts. Accounting 11 September 2011.

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Chapter 2 Balance Sheet Accounts UNIT 3 Recording Transactions in T-Accounts

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  1. Chapter 2 Balance Sheet AccountsUNIT 3 Recording Transactions in T-Accounts Accounting 11 September 2011

  2. Transaction analysis sheets are useful in learning how to record transactions, however they are impractical due to the large number of financial events that occur each day in a business. • A more efficient method to collect, record, and summarize these events is to keep a separate account for each item. • An account is a form in which changes caused by transactions are recorded. • A simplified form of this record is called a T-account.

  3. Introducing T-accounts DEBIT CREDIT • Debit is the accounting term used for the left side of the account, Credit is the accounting term used for the right side of the account. • T-accounts are not needed in business but are often used by accountants for rough work when they analyze transactions.

  4. A separate account is required or each asset, for each liability, and for the owner’s equity on the balance sheet. • The beginning, or opening amounts on the balance sheet are called balances.

  5. Asset accounts have a normal DEBIT balance • to increase, debit the account any ASSET account debit credit balance increase decrease

  6. Liability accounts have a normal credit balance • To increase, credit the account any LIABILITY account debit credit balance decrease increase

  7. The owner’s equity account has a normal credit balance • To increase, credit the account owner’s equity account debit credit balance decrease increase

  8. Introducing ledgers • A ledger is a group of accounts. • To open accounts in the ledger, these steps should be followed: • Place the account name in the middle of each account • Record the date and opening balance from the balance sheet on the appropriate side in the account.

  9. Double-entry accounting • One of the most important principles in accounting is that for every transaction, double-entry accounting requires that a debit amount equal to a credit amount must be recorded. • The total of the debit amount must always equal the total of the credit amount for each transaction.

  10. Recording transactions in accounts Step 1: determine which accounts change in value as a result of the transaction. (two or more accounts will change in value as a result of each transaction) Step 2: identify the type of account that has changed. (asset? Liability? Or owner’s equity?)

  11. Recording transactions in accounts Step 3: decide whether the change is an increase or a decrease in the account. Step 4: Decide whether the change is recorded as a debit or a credit in the account. (Note that the ledger must remain in balance.)

  12. Transaction 1: Aug 2 Received $500 cash as payments on membership dues owing. • The two accounts that are affected are Cash and Accounts Receivable. • The Cash account is increased with a debit • The Accounts Receivable account is decreased with a credit Cash Accounts Receivable Aug 2 500 Aug 2 500

  13. Transaction 2: Aug 5 Purchased $25 worth of office supplies from Central Supply Co., with 30 days to pay. Office Supplies Accounts Payable Aug 5 25 Aug 5 25

  14. Transaction 3: Aug 5 Paid $705 now due to Equipment Unlimited for goods previously purchased but not paid for. Accounts Payable Cash Aug 5 705 Aug 5 25 Aug 2 500 Aug 5 705

  15. Transaction 4: Aug 7 Purchased three new tennis trainers for $545 each (total $1635). A cash down payment of $535 was made. The remaining amount ($1100) is to be paid at a later date. Training Equipment Cash Accounts Payable Aug 7 1635 Aug 2 500 Aug 5 705 Aug 5 705 Aug 5 25 7 535 7 1100

  16. Transaction 5: Aug 7 Owner invested an additional $5000 in the business. Cash R. Millar, Capital Aug 2 500 Aug 5 705 Aug 7 5000 7 5000 7 535

  17. Calculating New Balances • Add up the debit side of the account. 2. Add up the credit side of the account. 3. Subtract the smaller amount from the larger and place the answer on the larger side of the account. This is the new balance for the account.

  18. Calculating New Balances Cash Aug 2 500 Aug 5 705 7 5000 7 535 5500 1240 Balance 4260

  19. Preparing a Trial Balance • A trial balance is prepared to verify that the total debits are still equal to the total credits in the ledger. • The trial balance is a list of accounts with their current balances. • They are listed in the order that they appear in the ledger. • Two columns are required to prepare the trial balance, one for debits, one for credits. • The trial balance must have a heading.

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