Accounting Chap 3 Flashcards
are the most effective way to learn the double-entry system.
Further, practicing accountants use them frequently when analyzing business
transactions.
T accounts
represents the fact that every transaction has a dual effect on the accounting equation.
Double-entry accounting
A separate account records the increases and decreases in each type of asset, liability, owner’s equity, revenue, and expense
T account gets its name from the fact it resembles the letter T.
are totals on the debit and credit sides.
Footings
The difference between the footings is called the
balance of the account.
The balance is written on the side with the ____ footing.
larger
3 Major Parts of an Account:
- Each account has a ___ .
- The left side is the ___ of each account.
- The right side is the ___ of each account.
- title
- debit side
- credit side
means to enter an amount on the left side
Debit
means to enter
an amount on the right side
credit
- Are on the left side of the accounting equation.
- Increases are entered on the debit, or left, side.
- Decreases are entered on the credit, or right, side.
Assets
- Are on the right side of the accounting equation.
- Increases are entered on the credit, or right, side.
- Decreases are entered on the debit, or left, side.
Liabilities and Owner’s Equity
- The accounting equation is Assets = Liabilities + Owner’s
Equity. - The “umbrella” expands owner’s equity.
- The owner’s equity “umbrella” includes capital, revenue, expense, and drawing accounts.
The Owner’s Equity Umbrella
Since drawing and expenses decrease owner’s equity, they are shown on the debit side of the umbrella. (Debits decrease owner’s equity).
As expenses and drawing increase (debits), owner’s equity decreases. Revenue increases owner’s equity and is shown on the credit side.
- Is the owner’s investment in the business.
- Increases are recorded on the credit side.
- Decreases are recorded on the debit side.
Owner’s Capital
- Are the owner’s asset withdrawals for personal reasons.
- Increases are recorded on the debit side.
- Decreases are recorded on the credit side.
Drawing
- Are the earnings of the business.
- Increases are recorded on the credit side.
- Decreases are recorded on the debit side.
Revenues
- Are the costs of doing or being in business.
- Increases are recorded on the debit side.
- Decreases are recorded on the credit side.
Expenses
Is on the same side of an account that is increased the account.
Normal balances
Asset accounts’ normal balances are on the ___ side;
therefore, they have a ___ balance
debit
debit
Liability accounts’ and owner’s equity normal balances are on
the ____ side; therefore, they have a ___ balance.
credit
credit
Expense and drawing accounts are ___ ; therefore, their
normal balance is a ____ .
debited
debit
Steps in Transaction Analysis
- What happened?
- Which accounts are affected?
a) Identify the accounts.
b) Classify the accounts.
c) Locate the accounts in the expanded accounting
equation—left or right. - How is the accounting equation affected?
a) Determine whether the accounts have increased or
decreased.
b) Determine whether the accounts should be debited or
credited.
c) Make certain the accounting equation remains in balance after the transaction has been entered.
i) Assets = Liabilities + Owner’s Equity
ii) Debits = Credits for every transaction
Transaction Analysis
It is important to go through the three steps when analyzing transactions. The transaction must be fully understood before it can be accounted for correctly. Transactions in this chapter are easy to understand. Transactions in business can become quite complex, making this first step very important.
double-entry framework transactions
1
Transaction (a):
Investment by owner
a) An increase in Cash is entered as a debit.
b) An increase in Capital is entered as a credit
Transaction (b):
Purchase of an asset for cash
a) An increase in an asset (e.g., Delivery Equipment) is entered as a debit.
b) A decrease in Cash is entered as a credit.
Transaction (c):
Purchase of an asset on account
a) An increase in an asset (e.g., Delivery Equipment) is entered as a debit.
b) An increase in Accounts Payable is entered as a credit.
Transaction (d):
Payment on a loan
a) A decrease in Accounts Payable is entered as a debit.
b) A decrease in Cash is entered as a credit.
Transaction (e):
Delivery revenues earned in cash
a) An increase in Cash is entered as a debit.
b) An increase in Delivery Fees is entered as a credit.
Transaction (f):
Paid rent for month
a) An increase in Rent Expense is entered as a debit.
b) A decrease in Cash is entered as a credit.
Transaction (g):
Paid telephone bill
a) An increase in Telephone Expense is entered as a debit.
b) A decrease in Cash is entered as a credit.
Transaction (h):
Delivery revenues earned on account
a) An increase in Accounts Receivable is entered as a debit.
b) An increase in Delivery Fees is entered as a credit.
Transaction (i):
Purchase of supplies
a) Supplies will last several months; therefore, they are treated as an asset.
b) An increase in Supplies is entered as a debit.
c) A decrease in Cash is entered as a credit.
Transaction (j):
Payment of insurance premium
a) Since insurance is paid in advance and will provide future benefits, it is treated as an asset.
b) An increase in Prepaid Insurance is entered as a debit.
c) A decrease in Cash is entered as a credit.
Transaction (k):
Cash receipts from prior sales on account
a) An increase in Cash is entered as a debit.
b) A decrease in Accounts Receivable is entered as a
credit.
Transaction (l):
Purchase of asset on credit making a partial
payment
a) An increase in an asset (e.g., Delivery Equipment) is entered as a debit.
b) A decrease in Cash is entered as a credit.
c) An increase in Accounts Payable is entered as a credit.
d) Total of debits equals total of credits for this transaction.
Transaction (m):
Payment of wages
a) An increase in Wages Expense is entered as a debit.
b) A decrease in Cash is entered as a credit.
Transaction (n):
Deliveries made for cash and credit
a) An increase in Cash is entered as a debit.
b) An increase in Accounts Receivable is entered as a debit.
c) An increase in Delivery Fees in recorded as a credit.
d) Total debits equals total credits.
Transaction (o):
Withdrawal of cash from business
a) An increase in Jessica Jane, Drawing is entered as a debit.
b) A decrease in Cash is entered as a credit.
Summary of Transactions
A. Total each side of each T Account.
B. Write the totals (footings) in small numbers on each side of the T account.
C. The balance is shown on the side with the larger footing.
D. The footing serves as the balance for the accounts with entries on only one side of the account.
E. If an account has only a single entry, it is not necessary to enter a footing or balance.
Is prepared periodically to determine the equality of the debits and the credits.
Trial Balance
A. Is a list of all accounts showing the title and balance of each account.
B. Provides proof that the:
1. total of the debits equals the total of the credits.
2. accounting equation has remained in balance.
Trial Balance
Totals for the trial balance are not the same as those for the accounting equation.
The trial balance can be used as an aid in preparing the financial statements.
The ______ compares the sum of all accounts with debit balances (assets, drawing, and expenses) with those with credit balances (liabilities, owner’s equity, and revenue).
trial balance
The _______ compares the sum of the asset accounts with the sum of the liabilities and owner’s equity accounts using the expanded equation (Assets = Liabilities + Capital – Drawing + Revenue – Expenses).
accounting equation
