college accounting

1
Chapter
3
Skyline College
2
The Accounting Equation
ASSETS The property a business owns
LIABILITIES The debts of the business


OWNERS EQUITY The owners financial interest in
the business
3
Advantages of Accounts

• Accounts help to
• analyze,
• record,
• classify,
• summarize,
• and report financial information.

4
Classification of Accounts

• Asset Accounts
• Asset accounts show the property a business
  owns.
• Liability Accounts
• Liability accounts show the debts of the
  business.
• Owners Equity Accounts
• Owners equity accounts show the owners
  financial interest in the business.

5
T Accounts


ASSETS
LIABILITIES
OWNERS 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 owners equity account.

• Owners equity appears on the right side of the
  accounting equation (Assets Liabilities
  Owners 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

1. Analyze the financial event.

• Identify the accounts affected.
• Classify the accounts affected.
• Determine the amount of increase or decrease for
  each account.

1. Apply the left-right rules for each account
   affected.
2. 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 JTs Consulting Services.
• Analysis
• (a) The asset account, Cash, is increased by
  90,000.
• (a) The owners equity account, Jason Taylor,
  Capital, is increased by 90,000.

10
Left-Right Rules

• LEFT Increases to asset accounts are recorded on
  the left side of the T account.

• RIGHT Increases to owners equity accounts are
  recorded on the right side of the T account.

ASSETS
OWNERS 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

• JTs 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
- (b) 10,000
(a) 90,000

• 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 Owners
  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

• JTs 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
- (b) 10,000 (d) 3,000
(a) 90,000

• 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

• JTs 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
Reviewing the Effects of the Transactions
Cash
Accounts Payable
-
(b) 12,000
- (e) 5,000
(a) 90,000

• The Cash account shows four transactions
• Initial investment (a)
• Equipment purchase (b)
• Supplies purchase (d)
• Payment on account (e)

34
Reviewing the Effects of the Transactions
Cash
Accounts Payable
-
(a) 90,000
(c) 12,000
- (e) 5,000

• The Accounts Payable account shows two
  transactions
• Credit purchase of equipment (c)
• Payment to creditor (e)

35
Business Transactions
Recording Prepaid Rent

• JTs 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
(a) 90,000
(f) 7,000

• The Cash account shows five transactions
• Initial investment (a)
• Equipment purchase (b)
• Supplies purchase (d)
• Payment on account (e)
• Advance rent payment (f)

40
Account Balances
41
Calculating the Account Balance

1. Compute the totals of each side of the T
   account.
2. Subtract the smaller total from the larger total.
   The result is the account balance.

42
Recording Account Balances
IF
THEN
the balance is recorded on the right side.
the total on the right side is larger than the
total on the left side,
the balance is recorded on the left side.
the total on the left side is larger,
that amount is the balance.
an account shows only one amount,
the total of those entries is the account balance.
an account contains entries on only one side,
43
Account Balance
Cash
(a) 90,000
- (b) 10,000 (d) 3,000 (e) 5,000 (f)
7,000
25,000
90,000
(90,000 25,000 65,000)
44
ASSETS
LIABILITIES
OWNERS 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
OWNERS 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 owners equity accounts are classified as

• Revenue
• Expense
• Separate accounts are used to record revenue and
  expense transactions.

46
Owners Equity
Revenue
Decrease Side
Increase Side
Decrease Side
Increase Side

• Revenues increase owners equity.

• Increases in owners 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
JTs 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
JTs Consulting Services
Which account is credited?
Which account is debited?
For what amount?
For what amount?
50
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
51
Accounts Receivable

• The accounts receivable account is used for
  charge customers.
• Accounts receivable is classified as an asset.

52
Business Transaction
Record Revenue from Services Sold on Credit
In December JTs Consulting Services earned
9,000 from various charge accounts
clients. Analysis (h) The asset account,
Accounts Receivable, is increased by
9,000. (h) The revenue account, Fees Income, is
increased by 9,000.
53
Left-Right Rules
REVENUE
ASSETS
Record increases
Record increases
54
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?
55
T-Account Presentation
Accounts Receivable
Fees Income
(h) 9,000
(h) 9,000
56
Reviewing the Effects of the Transactions
Accounts Receivable
Fees Income
(g) 26,000
(h) 9,000
(h) 9,000
REVENUE ACCOUNTS
Record increases
-Record decreases
57
Business Transaction
Recording Collections from Accounts Receivable
Charge account clients paid 4,000, reducing
theamount owed to JTs Consulting Services.
Analysis (i) The asset account, Cash, is
increased by 4,000. (i) The asset account,
Accounts Receivable, is decreased by 4,000.
58
Left-Right Rules
ASSETS
ASSETS
Record increases
Record decreases -
59
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?
60
T-Account Presentation
Cash
Accounts Receivable
(i) 4,000
- (i) 4,000
61
Reviewing the Effects of the Transactions
Cash
Accounts Receivable
Bal. 65,000 (g) 26,000
- (i) 4,000
(h) 9,000
(i) 4,000

• Remember
• The revenue was recorded when the sales on
  credit were recorded. . . not. . .
• when cash is collected.

62
Owners Equity
Decrease Side
Increase Side
Revenue
Expense
Increase Side
Decrease Side
Increase Side
Decrease Side

• Expenses decrease owners equity.

• Decreases in owners equity appear on the left
  side of the T accounts.

63
Business Transaction
Recording an Expense for Salaries
In December JTs Consulting Services paid 7,000
in salaries. Analysis (j) The asset account,
Cash, is decreased by 7,000. (j) The expense
account, Salaries Expense, is increased by
7,000.
64
Left-Right Rules
EXPENSE
ASSETS
Record increases
Record decreases -
65
T-Account Presentation
Which T account has an entry on the right?
Which T account has an entry on the left?
For what amount?
For what amount?
66
T-Account Presentation
Salaries Expense
Cash
(j) 7,000
- (j) 7,000
67
Reviewing the Effects of the Transactions
Salaries Expense
Cash
Bal. 65,000 (g) 26,000 (h)
4,000
(j) 7,000
- (j) 7,000
EXPENSE ACCOUNTS
-Record decreases
Record increases
68
Business Transaction
Recording an Expense for Utilities
JTs Consulting Services issued a check for 500
to pay the utilities bill. Analysis (k) The
asset account, Cash, is decreased by 500. (k)
The expense account, Utilities Expense, is
increased by 500.
69
Left-Right Rules
EXPENSE
ASSETS
Record increases
Record decreases -
70
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?
71
T-Account Presentation
Utilities Expense
Cash
(k) 500
- (k) 500
72
Reviewing the Effects of the Transactions
Utilities Expense
Cash
(k) 500
- (j) 7,000
Bal. 65,000 (g) 26,000 (h)
4,000
(k) 500
73
The Drawing Account
74
Owners Equity
Decrease Side -
Increase Side
Revenue
Expense
Increase Side
Increase Side
Decrease Side
Decrease Side
Drawing
Increase Side
Decrease Side -

• Drawing decreases owners equity.

• Decreases in owners equity appear on the left
  side of the T accounts.

75
Business Transaction
The Drawing Account
Jason Taylor wrote a check to withdraw 4,000
cash for personal use. Analysis (l) The asset
account, Cash, is decreased by 4,000. (l) The
owners equity account, Jason Taylor, Drawing, is
increased by 4,000.
76
Left-Right Rules
DRAWING ACCOUNT
ASSETS
Record increases
Record decreases -
77
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?
78
T-Account Presentation
Jason Taylor, Drawing
Cash
(l) 4,000
- (l) 4,000
79
Reviewing the Effects of the Transactions
Jason Taylor, Drawing
Cash
-
Bal. 65,000 (g) 26,000 (i)
4,000
(l) 4,000

1. 7,000
2. 500

(l) 4,000
80
The Rules of Debit and Credit
Any Account
DEBIT SIDE
CREDIT SIDE
Left Side DEBIT
Right Side CREDIT

• Accountants refer to the left side of an account
  as the debit side instead of saying the left
  side.
• The right side of the account is called the
  credit side.

81
Double-Entry System
Every transaction must have at least two parts

• Debit
• Credit

82
Rules for Debits and Credits
Asset Accounts
Liability Accounts
Owners Capital Account
Debit Credit
- Increase
Decrease Side Side (Normal
Bal.)
Debit Credit
- Decrease
Increase Side
Side ( Normal
Bal.)
Debit Credit
- Decrease
Increase Side Side ( Normal
Bal.)
Owners Drawing Account
Revenue Accounts
Expense Accounts
Debit Credit
- Increase Decrease
Side Side (Normal
Bal.)
Debit Credit
-
Increase Decrease Side
Side (Normal Bal.)
Debit Credit -
Decrease Increase Side
Side
(Normal Bal.)
83
The Trial Balance
84
Complete the trial balance in six steps.

1. Enter the trial balance heading showing the
   company name, report title, and closing date for
   the accounting period.
2. List the account names in the same order as they
   appear on the Chart of Accounts (financial
   statements).

• Assets
• Liabilities
• Owners Equity
• Revenue
• Expenses

85
Complete the trial balance in six steps.
3. Enter the ending balance of each account in
the appropriate Debit or Credit column. 4. Total
the Debit column. 5. Total the Credit column. 6.
Compare the total debits with the total credits.
86
(No Transcript)
87
Some common errors in a trial balance are

• Adding trial balance columns incorrectly
• Recording only half a transaction for example,
  recording a debit but not recording a credit,
  or vice versa
• Recording both halves of a transaction as debits
  or credits rather than recording one debit
  and one credit
• Recording an amount incorrectly from a
  transaction
• Recording a debit for one amount and a credit
  for a different amount
• Making an error when calculating the account
  balances

88
Finding Trial Balance Errors
1. Check the arithmetic.
89

1. Check that the correct account balances were
   transferred to the correct trial balance columns.

90
Financial Statements
After the trial balance is prepared, the
financial statements are prepared.

• Net income from the income statement is used on
  the statement of owners equity.
• The ending balance of the Jason Taylor, Capital
  account, computed on the statement of
  owners equity, is used on the balance
  sheet.

91
(No Transcript)
92
Chart of Accounts

• Each account has a number and a name.

• The balance sheet accounts are listed first,
  followed by the income statement accounts.

• The account number is assigned based on the type
  of account.

93
(No Transcript)
94
Permanent Accounts

• Permanent accounts are

• Assets
• Liabilities
• Owners capital
• The permanent accounts appear on the balance
  sheet at the end of an accounting period.
• The balances of these accounts are then carried
  forward to start the new accounting period.

95
Temporary Accounts

• Temporary accounts are

• Drawing
• Revenue
• Expenses