College Accounting Notes chpt 3

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Chapter Overview

Title: The Double Entry Framework

  • Published by Cengage Learning, 22nd Edition (2014).

Learning Objectives

Learning Objective 1: Define the Parts of a T Account

  • A T account is a visual representation used to track debits and credits associated with a particular account.

  • Parts of a T Account:

    • Left Side: Known as the debit side.

    • Right Side: Known as the credit side.

The T Account Structure

T Account, Part 1-5

  • Every T account has two sides:

    • Increase Side: Reflects the amount added to the account.

    • Decrease Side: Reflects the amount deducted from the account.

  • Debit is always indicated on the left and credit on the right.

Learning Objective 2: Foot and Balance a T Account

Balancing a T Account

  1. Find the Balance: Calculate by determining the difference between the debit and credit totals (footings).

Learning Objective 3: Describe the Effects of Debits and Credits on Accounts

Debits and Credits Defined

  1. Debit: To debit an account means to enter an amount on the left side.

  2. Credit: To credit an account means to enter an amount on the right side.

  3. Impact on Balances: The effect can either increase or decrease the account balance depending on the specific account type.

The Accounting Equation and Owner’s Equity

Owner’s Capital

  • Composed of resources from the owner used to finance the business.

Financial Statements Components

Assets

  • Resources owned by a business (e.g., cash, accounts receivable).

Liabilities

  • Obligations owed by a business (e.g., accounts payable).

Revenues

  • Income generated from business activities (e.g., sales revenue).

Expenses

  • Costs incurred in the process of earning revenues (e.g., employee wages).

Drawings

  • Withdrawals made by the owner for personal use, reducing owner's equity.

Normal Balances

Normal Balances Overview (Refer to Figure 3-3)

Account

Increase

Decrease

Normal Balance

Assets

Debit

Credit

Debit

Liabilities

Credit

Debit

Credit

Owner's Capital

Credit

Debit

Credit

Revenues

Credit

Debit

Credit

Expenses

Debit

Credit

Debit

Drawings

Debit

Credit

Debit

Learning Objective 4: Use T Accounts to Analyze Transactions

Steps in Transaction Analysis (Refer to Figure 3-4)

  1. Identify What Happened: Understand the event details.

  2. Determine Affected Accounts: Identify which accounts were impacted.

    • Classify these accounts: assets, liabilities, owner’s equity, revenues, or expenses.

    • Determine whether accounts are on the left (debits) or right (credits) side in the accounting equation.

  3. Assess Effects on the Accounting Equation:

    • Ascertain whether accounts have increased or decreased and confirm accordingly.

    • Ensure the accounting equation (Assets = Liabilities + Owner’s Equity) remains balanced.

Example Transactions

Investment by Owner

  1. Rohan Macsen invested $2,000 in the business.

    • Affected Accounts: Cash, R. Macsen, Capital

    • Account Classification: Cash (Asset), R. Macsen, Capital (Owner’s Equity)

    • Location in Accounting Equation: Cash (left), R. Macsen, Capital (right).

    • Resulting Effects:

      • Cash increased by $2,000.

      • R. Macsen, Capital increased by $2,000.

Purchase of an Asset for Cash

  1. Purchased a motor scooter (delivery equipment) for $1,200 cash.

    • Affected Accounts: Cash, Delivery Equipment

    • Account Classification: Cash (Asset), Delivery Equipment (Asset)

    • Location in Accounting Equation: Cash (left), Delivery Equipment (right).

    • Resulting Effects:

      • Delivery Equipment increased by $1,200.

      • Cash decreased by $1,200.

Purchase of an Asset on Account

  1. Purchased a second motor scooter for $900 on account.

    • Affected Accounts: Delivery Equipment, Accounts Payable

    • Account Classification: Delivery Equipment (Asset), Accounts Payable (Liability)

    • Location in Accounting Equation: Delivery Equipment (right), Accounts Payable (right).

    • Resulting Effects:

      • Delivery Equipment increased by $900.

      • Accounts Payable increased by $900.

Revenues and Expenses Examples

Revenues Earned in Cash

  1. Rohan received $500 in cash for deliveries rendered.

    • Affected Accounts: Cash, Revenue

    • Account Classification: Cash (Asset), Revenue (Owner’s Equity)

    • Increased each account.

Payment of Wages

  1. Rohan paid $650 in wages to employees.

    • Affected Accounts: Cash, Wages Expense

    • Account Classification: Cash (Asset), Wages Expense (Expense)

    • Cash decreased; Wages Expense increased.

Withdrawal of Cash from Business

  1. Rohan withdrew $150 for personal use.

    • Affected Accounts: Cash, Drawings

    • Account Classification: Cash (Asset), Drawings (Owner’s Equity)

    • Cash decreased; Drawings increased.

Learning Objective 5: Prepare a Trial Balance

Purpose of the Trial Balance

  • A trial balance is a list of all accounts and their balances which:

    • Totals debits and credits to ensure balance.

    • Verifies that the accounting equation holds true and that all entries have been recorded accurately.

    • Serves as a precursor to preparing financial statements.

Trial Balance Structure

Components of a Trial Balance

  1. Heading Elements:

    • Company Name

    • Document Title: “Trial Balance”

    • Date of Preparation

Rohan’s Campus Delivery

Trial Balance Format

  • Presented in a structured format with each account’s balance for verification.