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Analyzing Business Transactions

Using T Accounts

Section 1: Transactions That Affect

Assets, Liabilities, and Owner’s Equity

Chapter

3

Section Objectives

1. Set up T accounts for assets, liabilities,

and owner’s equity.

2. Analyze business transactions and enter

them in the accounts.

3. Determine the balance of an account.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

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The Accounting Equation

ASSETSThe property a

business owns

LIABILITIESThe debts of

the business

OWNER’S

EQUITYThe owner’s financial

interest in the business

=

+

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Classification of Accounts

Asset Accounts

Asset accounts show the property a business

owns.

Liability Accounts

Liability accounts show the debts of the

business.

Owner’s Equity Accounts

Owner’s equity accounts show the owner’s

financial interest in the business.

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= +

T Accounts

ASSETS

+

Record

Increases

LEFT SIDE

-

Record

Decreases

RIGHT SIDE

LIABILITIES

-

Record

Decreases

LEFT SIDE

+

Record

Increases

RIGHT SIDE

OWNER’S EQUITY

-

Record

Decreases

LEFT SIDE

+

Record

Increases

RIGHT SIDE

Set up T accounts for assets, liabilities

and owner’s equity.

Objective 1

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Effects of Business Transactions

1. Analyze the financial event.

Steps to analyze the effects of the business

transactions:

2. Apply the left-right rules for each account affected.

3. Make the entry in T-account form.

Identify the accounts affected.

Classify the accounts affected.

Determine the amount of increase or decrease for each

account.

Objective 2 Analyze business transactions and enter

them in the accounts.

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Initial Investment

LEFT Increases to asset accounts are recorded on the

left side of the T account.

RIGHT Increases to owner’s equity accounts are

recorded on the right side of the T account.

Jason Taylor withdrew $90,000 from personal

savings and deposited it in the new business

checking account for JT’s Consulting Services.

Cash Jason Taylor, Capital

(a) 90,000 (b) 90,000

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Business Transaction

JT’s Consulting Services issued a $10,000 check to

purchase a computer and other equipment.

Analysis:

(c) The asset account, Equipment, is increased by $10,000.

(d) The asset account, Cash, is decreased by $10,000.

Equipment

(c) 10,000

Cash

(d) 10,000

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Purchase of Equipment on Account

The firm bought office equipment for $12,000 on account

from Office Plus.

Analysis:

(e) The asset account, Equipment, is increased by $12,000.

(f) The liability account, Accounts Payable, is increased by $12,000.

Equipment Accounts Payable

(e) 12,000 (f) 12,000

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Purchase of Supplies for Cash

JT’s Consulting Services issued a check for $3,000 to

Office Supplies Inc. to purchase office supplies.

Analysis:

(g) The asset account, Supplies, is increased by $3,000.

(h) The asset account, Cash, is decreased by $3,000.

Supplies

(g) 3,000

Cash

(h) 3,000

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Payment of a Liability

JT’s Consulting Services issued a check in the amount

of $5,000 to Office Plus.

Analysis:

(i) The asset account, Cash, is decreased by $5,000.

(j) The liability account, Accounts Payable, is decreased by $5,000.

Accounts Payable

(j) 5,000

Cash

(i) 5,000

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Prepayment of Rent

JT’s Consulting Services issued a check for $7,000 to

pay rent for the months of December and January.

Analysis:

(k) The asset account, Prepaid Rent, is increased by $7,000.

(l) The asset account, Cash, is decreased by $7,000.

Prepaid Rent

(k) 7,000

Cash

(l) 7,000

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Determine the balance of an

accountObjective 3

An account balance is the difference between the

amounts recorded on the two sides of an account.

A footing is a small pencil figure written at the base of an

amount column showing the sum of the entries in the

column.

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the total of those entries is the

account balance.

an account contains entries on only

one side,

that amount is the balance.an account shows only one amount,

the balance is recorded on the left

side.

the total on the left side is larger,

the balance is recorded on the right

side.

the total on the right side is larger

than the total on the left side,

Recording Account Balances

IF THEN

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Computing the

Account Balance

Cash

(a) 90,000 (d) 10,000

(h) 3,000

(i) 5,000

(l) 7,000

-----------25,000 Footing

Bal. 65,000(90,000 – 25,000)

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Account balances for Carter Consulting Services

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Accounts Payable Jason Taylor, Capital

(a) 90,000 (d) 10,000 (j) 5,000 (f) 12,000 (b) 90,000

(h) 3,000 Bal. 7,000

(i) 5,000

(l) 7,000

Bal. 65,000 25,000

Supplies

SUMMARY OF ACCOUNT BALANCES

(g) 3,000

ASSETS = LIABILITIES + OWNER’S EQUITY

Prepaid Rent 65,000 7,000 90,000

3,000

(k) 7,000 7,000

22,000

Equipment

97,000 = 7,000 + 90,000

(c) 10,000

(e) 12,000

Bal. 22,000

Summary of Account Balances

Analyzing Business Transactions

Using T Accounts

Section 2: Transactions That Affect

Revenue, Expenses, and Withdrawals

Chapter

3

Section Objectives

4. Set up T accounts for revenue and expenses.

5. Prepare a trial balance from T accounts.

6. Prepare an income statement, a statement of owner’s equity, and a balance sheet.

7. Develop a chart of accounts.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3-18

Owner’s Equity

Decrease

Side

Increase

Side

Revenue

Decrease

Side

Increase

Side

Revenues increase owner’s equity.

Increases in owner’s equity appear on the right side of

the T account.

Therefore, increases in revenue appear on the right side of revenue T accounts.

T-Account for Revenue

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The right side of the revenue account shows

increases and the left side shows decreases.

Revenue

Decrease

Side

Increase

Side

Decreases in revenue accounts are rare but might

occur because of corrections or transfers.

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Reviewing the Effects of the Transactions

Cash

Bal. 65,000

(m) 26,000

Fees Income

(n) 26,000

$26,000 (m) is entered on

the left (increase) side of

the asset account Cash.

$26,000 (n) is entered on

the right side of the Fees

Income account.

Set up T accounts for revenue

and expensesObjective 4

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Recording Revenue from Services Sold

on Credit

In December JT’s Consulting Services earned

$9,000 from various charge accounts clients.

Analysis:

(o) The asset account, Accounts Receivable, is increased

by $9,000.

(p) The revenue account, Fees Income, is increased by

$9,000.

Accounts Receivable

(o) 9,000

Fees Income

(p) 9,000

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Analysis:

(q) The asset account, Cash, is increased by $4,000.

(r) The asset account, Accounts Receivable, is decreased by

$4,000.

Receipt of Payments on Account

Charge account clients paid $4,000, reducing the

amount owed to JT’s Consulting Services.

Cash Accounts Receivable

(q) 4,000 (r) 4,000

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Expenses decrease owner’s equity.

Owner’s Equity

Decrease

SideIncrease

Side

Revenue

Decrease

Side

Increase

Side

Expense

Increase

SideDecrease

Side

Decreases in owner’s equity appear on the left side of the

T accounts.

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Payment of Salaries

In December JT’s Consulting Services paid $7,000 in

salaries.

Analysis:

(s) The asset account, Cash, is decreased by $7,000.

(t) The expense account, Salaries Expense, is increased by

$7,000.

Salaries Expense Cash

(t) 7,000 (s) 7,000

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Payment of Utilities

JT’s Consulting Services issued a check for $500 to pay

the utilities bill.

Analysis:

(u) The asset account, Cash, is decreased by $500.

(v) The expense account, Utilities Expense, is increased by

$500.

Utilities Expense

(v) 500

Cash

(u) 500

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Drawing decreases owner’s equity.

Owner’s Equity

Decrease Side Increase Side

Revenue

Decrease Side Increase Side

Expense

Increase Side Decrease Side

Drawing

Increase Side Decrease Side

Decreases in owner’s equity appear on the left side of the

T accounts.

Owner Withdrawals

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Jason Taylor wrote a check to withdraw $4,000 cash for

personal use.

Analysis:

(w) The asset account, Cash, is decreased by $4,000.

(x) The owner’s equity account, Jason Taylor, Drawing, is

increased by $4,000.

The Owner Withdraws Funds

Jason Taylor, Drawing

(x) 4,000

Cash

(w) 4,000

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The Rules of Debit and Credit• A debit is an entry on the left side of an

account.

• A credit is an entry on the right side of an

account.

• A double-entry system is an accounting

system that involves recording the effects of

each transaction as debits and credits.

• Every transaction in a Double entry

accounting system has at least one debit and

one credit.

• Every transaction must have at least one

debit and one credit.

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Any Account

Left Side Right Side

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.

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Debit Credit

+ -

Increase Decrease

Side Side

(Normal

Bal.)

Debit Credit

- +

Decrease Increase

Side Side

( Normal Bal.)

Debit Credit

- +

Decrease Increase Side

Side ( Normal Bal.)

Debit Credit

+ -

Increase Decrease

Side Side

(Normal

Bal.)

Debit Credit

- +

Decrease Increase

Side Side

(Normal

Bal.)

Debit Credit

+ -

Increase Decrease

Side Side

(Normal

Bal.)

Rules for Debits and CreditsAsset Accounts Liability Accounts Owner’s Capital Account

Owner’s Drawing Account Revenue Accounts Expense Accounts

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Objective 5 Prepare a trial balance from T accounts

1. Use the proper heading.

2. List the accounts in chart of account order.

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 column totals. They should be equal.

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DEBIT CREDIT

ACCOUNT NAME

Cash

Accounts Receivable

Supplies

Prepaid Rent

Equipment

Jason Taylor, Capital

Accounts Payable

Jason Taylor, Drawing

Fees Income

Salaries Expense

Utilities Expense

Totals 132,000 132,000

83,500

7,000

90,000

4,000

35,000

7,000500

22,0007,000

5,000

3,000

JT’s Consulting Services

Trial Balance

December 31, 2010

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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

Some common errors in a trial balance are:

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Objective 6 Prepare an income statement, a statement

of owner’s equity, and a balance sheet

After the trial balance is prepared, the financial statements

are prepared.

Net income from the income statement is used on

the statement of owner’s equity.

The ending balance of the Jason Taylor, Capital

account, computed on the statement of owner’s

equity, is used on the balance sheet.

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JT’s CONSULTING SERVICES

Balance Sheet

December 31, 2010

ASSETS LIABILITIES

Cash 83,500.00 Accounts Payable 7,000.00

Accounts Receivable 5,000.00

Supplies 3,000.00

Prepaid Rent 7,000.00 OWNER’S EQUITY

Equipment 22,000.00 Jason Taylor, Capital 113,500.00

Total Assets 120,500.00 Total Liabilities and Owner’s Equity 120,500.00

JT’s CONSULTING SERVICES

Statement Of Owner’s Equity

Month Ended December 31, 2010

Jason Taylor, Capital, Dec. 1, 2010 90,000.00

Net Income for December 27,500.00

Less Withdrawals for December 4,000.00

Increase in Capital 23,500.00

Jason Taylor, Capital, Dec. 31, 2010 113,500.00

JT’s CONSULTING SERVICES

Income Statement

Month Ended December 31, 2010

Revenue

Fees Income 35,000.00

Expenses

Salaries Expense 7,000.00

Utilities Expense 500.00

Total Expenses 7,500.00

Net Income 27,500.00

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Objective 7 Develop a 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.

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Balance Sheet Accounts

100-199 ASSETS

101 Cash

111 Accounts Receivable

121 Supplies

137 Prepaid Rent

141 Equipment

200-299 LIABILITIES

202 Accounts Payable

300-399 OWNER’S EQUITY

301 Jason Taylor, Capital

Statement of Owner’s Equity Account

302 Jason Taylor, DrawingIncome Statement Accounts

400-499 REVENUE

401 Fees Income

500-599 EXPENSES

511 Salaries Expense

514 Utilities Expense

JT’s CONSULTING SERVICES

Chart of Accounts

Account Number Account Name

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A permanent account is an account

that is kept open from one

accounting period to the next.

A temporary account is an account

whose balance is transferred to

another account at the end of an

accounting period.

Permanent and Temporary Accounts

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Thank Youfor using

College Accounting, 12th Edition

Price • Haddock • Farina