ACC2013 Ch3 Pt1 Key Vocabulary
T-Accounts: Foundations and Properties
Purpose: Visualize how transactions affect the Balance Sheet Accounts (Assets, Liabilities, Stockholders’ Equity) using T-accounts; prepares for Part 2 (Journal Entries).
Core idea: Double-entry accounting — every transaction affects at least two accounts so that the accounting equation remains in balance.
The full accounting cycle (as reviewed): typically steps are 1) identify the transactions, 2) record in the journal, 3) post to the general ledger, 4) prepare a trial balance, 5) prepare financial statements, 6) close temporary accounts, 7) prepare post-closing trial balance. In this chapter we focus on Step 1 & Step 2 (recording transactions via T-accounts and later Journal Entries).
Key concepts and terminology
T-Accounts: a visual tool to show debits and credits for each account.
Asset accounts: increases on the left (debit) side; decreases on the right (credit) side.
Liability and Stockholders’ Equity accounts (collectively “Claims”): increases on the right (credit) side; decreases on the left (debit) side.
Expenses and Dividends: follow the same rules as left-side increases (debits) and right-side decreases (credits) depending on the account type; note the caveat: Expenses & Dividends are still part of the accounting equation and affect Retained Earnings via Net Income.
Abbreviations:
Debit = Dr.
Credit = Cr.
The collection of T-Accounts is kept up with in the _ _ (General Ledger).
We organize (stack) T-Accounts under the categories of BAE they represent (Assets, Liabilities, and Stockholders’ Equity).
End balance of a T-Account: the account balance at the end of the period; shown on the side where the balance resides (end balance side).
Normal balance sides:
Assets: the normal (increasing) side is the left (debit) side.
Liabilities & Stockholders’ Equity: the normal (increasing) side is the right (credit) side.
Relationship between sides: The right side of BAE (Liabilities + Stockholders’ Equity) is affected in the opposite way the left side (Assets) is affected — this is why double-entry keeps BAE in balance.
Steps to recording transactions in T-Accounts:
STEP 1 — Part 1: Determine which elements the transactions affect.
STEP 1 — Part 2: Determine how the transaction affects the elements (increase or decrease).
STEP 2 — Use the properties of the T-Accounts to show Increases / Decreases.
To show an Increase: Debit → [increases the appropriate side according to the account type]; Credit → [opposite side].
To show a Decrease: Debit → [opposite side]; Credit → [opposite side].
STEP 3 — Identify the specific _ affected by each event, and record the _ OR _ in the appropriate T Account.
Example structure for transacting (outline):
Assets: Debit = [increase], Credit = [decrease]
Liabilities + Owner’s Equity: Debit = [decrease], Credit = [increase]
Expanded notes on Owner’s Equity (OE) components:
OE = Common Stock + Retained Earnings* OR OE = Common Stock + Net Income – Dividends
Net Income = Revenues − Expenses
Retained Earnings = Beginning RE + Net Income − Dividends
Net effect on OE through transactions: Revenues increase OE; Expenses decrease OE; Dividends decrease OE (via affecting Retained Earnings)
Therefore, an accounting equation representation can also be shown as:
OE = Common ext{ Stock} + Retained ext{ Earnings}
or equivalently, using Net Income:
OE = Common ext{ Stock} + Net ext{ Income} - Dividends
and
Net ext{ Income} = Revenues - Expenses
Page 1–2: Fill‑in exercise completion (completions)
Debit abbreviation: Dr.
Credit abbreviation: Cr.
The collection of these T Accounts is kept up with in the _ _: General Ledger
We organize under the ___ of BAE they represent: categories of BAE (Assets, Liabilities, Stockholders’ Equity)
End balance is shown on the __ side: end balance side (depends on the account’s normal balance)
The _ side of a T Account is the side that ___ the account: normal balance side; increases the account
For Assets, the normal side is the _ side: Debit (left)
For Claims (L + SE), the normal side is the __ side: Credit (right)
Page 2: Properties of T-accounts
Normal balance side for BAE Assets = Debit, for Liabilities + Owner’s Equity = Credit.
Notice: The right side of BAE (Liabilities + Stockholders’ Equity) is affected in the way the left side of BAE (Assets) is affected: opposite way
Steps to recording transactions (reiterated):
STEP 1 → Part 1: Determine which elements the transactions affect
STEP 1 → Part 2: Determine how the transaction affects the elements
STEP 2 → Use the Properties of the T Accounts to show Increases / Decreases
To show an Increase we are going to: Debit → Credit
To show a Decrease we are going to: Debit → Credit
STEP 3 → Identify the specific _ affected by each event, and record the OR __ in the appropriate T Account
Example (Assets, Liabilities + Owner’s Equity):
Assets: Debit = , Credit =
Liabilities + Owner’s Equity: Debit = , Credit =
Page 3: Event 1 and OE expansion /
Event 1: Received $20,000 cash from the issue of common stock
T-account view:
Cash: Debit $20,000; Common Stock: Credit $20,000
Result: Both increases — an increase in assets and an increase in stockholders’ equity
How to memorize the effect on OE components: what Revenue/Expenses/Dividends do to Retained Earnings:
Revenues increase Retained Earnings; Expenses decrease Retained Earnings; Dividends decrease Retained Earnings
Basic structure of OE in a simplified form:
Assets = Liabilities + Stockholders' Equity
Cash = Common Stock + Retained Earnings
OE = Common Stock + Retained Earnings* = + +
OE = Common Stock + Net Income – Dividends
OE = Common Stock + Revenues – Expenses - Dividends
Page 4: Transaction table (Events 1–8) — Debits and Credits by account
Event 1. Acquired cash from the issue of common stock
Debit: Cash; Credit: Common Stock
Increases: Assets; Increases: Stockholders' Equity
Event 2. Provided services for cash
Debit: Cash; Credit: Service Revenue
Increases: Assets; Increases: Revenues (OE increases via Net Income)
Event 3. Paid cash for salaries expense
Debit: Salaries Expense; Credit: Cash
Increases: Expense; Decreases: Assets
Event 4. Purchased supplies for cash
Debit: Supplies; Credit: Cash
Increases: Supplies (Asset); Decreases: Cash
Event 5. Paid in advance for two-year lease on office space
Debit: Prepaid Rent; Credit: Cash
Increases: Prepaid Rent (Asset); Decreases: Cash
Event 6. Provided services on account
Debit: Accounts Receivable; Credit: Service Revenue
Increases: Assets (AR); Increases: Revenues
Event 7. Recognized expense for prepaid rent used up by period end
Debit: Rent Expense (or Prepaid Rent adjustment to Rent Expense as used); Credit: Prepaid Rent
Increases: Expense; Decreases: Prepaid Rent (Asset)
Event 8. Recorded accrued salaries at period end
Debit: Salaries Expense; Credit: Salaries Payable
Increases: Expense; Increases: Liabilities
Page 5: Exercise 3-17A — Montgomery Co. year 1
Given events (1–8):
1) Received $36,000 cash from issue of common stock
2) Performed $48,000 of services on account
3) Incurred $6,500 of other operating expenses on account
4) Paid $21,000 cash for salaries expense
5) Collected $34,500 of accounts receivable
6) Paid a $3,000 dividend to stockholders
7) Performed $9,500 of services for cash
8) Paid $5,500 of the accounts payablea. Post to T- accounts and determine ending balances (assume Beginning Retained Earnings = 0 unless stated otherwise).
b. Total Assets at Year 1 end:
c. Net Income for Year 1:
Working balances (example final balances after posting, assuming Beginning Retained Earnings = 0):
Cash: $50,500
Accounts Receivable: $13,500
Supplies: not in transactions
Prepaid Rent: not in transactions
Supplies/Prepaid etc.: not in transactions
Common Stock: $36,000
Accounts Payable: $1,000
Retained Earnings: $27,000 (assuming Net Income $30,000 − Dividends $3,000; Beg RE = 0)
Dividends: $3,000
Service Revenue: $57,500
Salaries Expense: $21,000
Other Operating Expense: $6,500
Net Income: $30,000
Total Assets = $64,000; Total Liabilities + Stockholders’ Equity = $64,000
Summary formulae:
Net\ Income = Revenues - Expenses = 57{,}500 - (21{,}000 + 6{,}500) = 30{,}000
Retained\ Earnings\ End = Beginning\ RE + Net\ Income - Dividends = 0 + 30{,}000 - 3{,}000 = 27{,}000
Assets = Liabilities + Stockholders' Equity = 64{,}000 = 1{,}000 + (36{,}000 + 27{,}000)
Page 6: The Trial Balance
Prepared before (unadjusted) trial balance and after (adjusted) trial balance to ensure that the BAE is still in balance and to show account’s ending balances.
Totals:
Total Debits = Total Credits
Balances listed under their _ __ (Assets first, then Liabilities, then Stockholders’ Equity)
In order of the basic accounting equation:
Assets, Liabilities, Stockholders’ Equity
Balancing the Trial Balance:
When DR & CR match: can still be incorrect; to check yourself:
Ensure you recorded every transaction
Ensure you recorded the same dollar amount
Correct amounts + recorded everything = correct!!
If DRs and CRs do not match:
Calculate the difference: Total Debits − Total Credits
If the difference is divisible by 2, it might indicate one or more balances were placed on the wrong side
If the difference/9 is a nonzero decimal or non-integer, you likely misposted a number
Still a difference? There is likely a posting error
To check yourself: verify each transaction and verify the amounts
Problem 3-25A: Identify the “normal” balance
a. Interest Receivable — Debit
b. Interest Revenue — Credit
c. Prepaid Insurance — Debit
d. Land — Debit
e. Salaries Payable — Credit
f. Salaries Expense — Debit
g. Supplies Expense — Debit
h. Consulting Revenue — Credit
i. Utilities Payable — Credit
j. Supplies — Debit
k. Service Revenue — Credit
l. Accounts Payable — Credit
m. Operating Expense — Debit
n. Unearned Revenue — Credit
o. Dividends — Debit
p. Cash — Debit
q. Insurance Expense — Debit
r. Accounts Receivable — Debit
s. Utilities Expense — Debit
t. Retained Earnings — Credit
u. Common Stock — Credit
Page 7: Exercise 3-19A — Preparing a Trial Balance
Morgan Company — December 31, Year 2 balances:
Land $30,000
Common Stock $80,000
Unearned Revenue $32,000
Operating Expense $41,000
Dividends $8,000
Office Supplies $2,500
Prepaid Rent $5,600
Advertising Expense $3,500
Cash $90,000
Retained Earnings, Beg. $9,000
Salaries Expense $18,000
Service Revenue $86,000
Accounts Payable $7,000
Accounts Receivable $15,400
Morgan Company Trial Balance (December 31, Year 2):
Debit: Cash 90,000; Accounts Receivable 15,400; Office Supplies 2,500; Prepaid Rent 5,600; Land 30,000; Dividends 8,000; Operating Expense 41,000; Salaries Expense 18,000; Advertising Expense 3,500
Credit: Common Stock 80,000; Retained Earnings 9,000; Unearned Revenue 32,000; Accounts Payable 7,000; Service Revenue 86,000
Totals: Debits = 214,000; Credits = 214,000
Takeaways:
Trial balance confirms math is balanced before preparing financial statements.
The normal balances in this exercise align with standard conventions: Assets and Expenses are typically Debit balances; Liabilities, Common Stock, Retained Earnings, Service Revenue are Credit balances; Dividends usually carry a Debit balance.
Quick reference formulas (LaTeX)
Accounting equation: Assets = Liabilities + Stockholders\' Equity
Net income: Net\ Income = Revenues - Expenses
Retained earnings ending: Ending\ Retained\ Earnings = Beginning\ Retained\ Earnings + Net\ Income - Dividends
OE composition (alternative forms):
OE = Common\ Stock + Retained\ Earnings
OE = Common\ Stock + Revenues - Expenses - DividendsTrial balance check: \text{Total Debits} = \text{Total Credits}