ANALYZING TRANSACTIONS INTO DEBIT AND CREDIT PARTS.docx
- 1. ANALYZING TRANSACTIONS INTO DEBIT AND CREDIT PARTS Objectives: 1. Show the relationship between the accounting equation and a T account. 2. Identify the debit and credit side, and the balance side of various accounts. 3. Restate and apply the two rules that are associated with the increase side of an account. 4. Restate and apply the four questions necessary to analyze transactions for starting a business into debit and credit parts. The accounting equation can be represented as a T, as shown below Assets = Liabilities + Owner’s Equity _________________________________________________________________________ Left side Right side The values of all things owned (assets) are on the left side of the accounting equation. The value of all equities or claim against the assets (liabilities and owner’s equity) are on the right side of the accounting equation. The total of amounts on the left side of the accounting equation must always equal the total of amounts on the right side. Therefore, the total of all assets on the left side of the accounting equation must always equal the total of all liabilities and owner’s equity. Accounts A record summarizing all the information affecting a single item in the accounting equation is known as an account. Transaction change the balances of accounts in the accounting equation. Accounting transactions must be analyzed to determine how account balances are changed. An accounting device used to analyze transactions is called a T account.
- 2. There are special names for amounts recorded on the left and right sides of an account. An amount recorded on the left side of an account is called debit. An amount recorded on the right side of an account is called credit. Assets = Liabilities + Owner’s Equity Left side Right side T Account _____________________________________________________________________________________ Left side Right side DEBIT SIDE CREDIT SIDE Increases, Decreases, and Balance in Accounts The sides of a T account are used to show increases and decreases in account balances. The Increase side of each kind of account can be associated with the accounting equation using two rules. 1. Assets are the left side of the accounting equation. Therefore, assets increase on the left, or debit, side of the account. 2. Liabilities and the owner’s capital account are on the right side of the accounting equation. Therefore, liabilities and the owner’s capital account increase on the right, or credit, side of the account. ACTIVITY 1: Determining the increase and decrease and the normal balance sides for accounts. Consider the following accounts. CASH Prepaid Insurance Accounts Receivable – White Company Accounts Payable – West End Hardware Accounts Receivable - New Decade Inc. Shelley Perez, Capital For each account, complete the following: 1. Prepare a T account
- 3. 2. Label the debit and credit side 3. Draw an up arrow (↑ ) on the increase side 4. Draw a down arrow (↓) on the decrease side. 5. Label the normal balance side. Please refer to pp. 24 – 25 of your text book. Write your activity in your notebook. ANALYZING HOW TRANSACTIONS AFFECT ACCOUNTS Received Cash from Owner as an Investment Assets = Liabilities + Owner’s Equity Cash Michael Delgado, Capital Debit Credit Debit Credit Normal Balance Normal Balance 20,000.00 20,000.00 CREDIT DEBIT Increases Increases JANUARY 2. Received cash from owner as an investment, P 20,000.00 The effect of this transaction is shown in the illustration. Before a transaction is recorded in the record of the business, the information is analyzed to determine which accounts are changed and how.
- 4. Each transaction changes the balances of at least two accounts. A list of accounts used by a business is Called CHART OF ACCOUNTS. When accounts are analyzed, debits must equal credits for each transaction. In addition, after a transaction is recorded, total debits must equal to total credits. The same four questions are used every time a transaction is analyzed into its debit and credit parts. Questions for Analyzing a Transaction into its Debit and Credit Parts Which accounts are affected? → Cash and Michael Delgado, Capital How is each account classified? → Cash in an asset account. Michael Delgado, Capital is an owner’s equity account How each classification changed? → Assets increase. Owner’s equity increases. How is each amount entered in the accounts? → Assets increase on the debit side. Therefore debit the asset account, Cash. Owner’s equity accounts increase on the credit side. Therefore, credit the owner’s equity account, Michael Delgado, Capital PAID CASH FOR SUPPLIES JANUARY 2. Paid cash for supplies, P 1,650.00 QUESTIONS FOR ANALYZING a TRANSACTION into its Debit and Credit Parts Which account is affected? → Supplies and Cash How is each account classified? → Supplies is an asset account. Cash is an asset account How is each classification changed? → One asset (Supplies) increases and another asset (Cash) decreases. How is each amount entered in the accounts? → Assets increases on the debit side. Therefore,
- 5. debit the asset account, Supplies. Assets decrease on the credit side. Therefore, credit the asset, Account, Cash. JANUARY 3. Paid cash for insurance, P 9,000.00 Questions for Analyzing a Transaction into its Debit and Credit Parts Which accounts are affected? → Prepaid Insurance and Cash How is each account classified? → Prepaid insurance is an asset account. Cash is an asset account. How is each classification changed? → One asset (Prepaid Insurance) increases and another asset (cash) decreases. How is each amount entered in the accounts? → Assets increase on the debit side. Therefore, debit the asset account, Prepaid Insurance. Assets decrease on the credit side. Therefore, credit the asset account, Cash. BOUGHT SUPPLIES ON ACCOUNT January 5. Bought supplies on account from Canyon Office Supplies, P 2,200.00 QUESTIONS FOR ANALYZING A TRANSACTION INTO ITS DEBIT AND CREDIT PARTS Which account are affected? → Supplies and Accounts Payable ----Canyon Office Supplies How is each account classified? → Supplies is an asset account. Accounts Payable --- Canyon Office Supplies is a liability account. How is each classification changed? → Assets increase. Liabilities increase. How is each amount entered in the accounts? → Assets increase on the debit side. Therefore, Debit the asset account, Supplies. Liabilities increase on the credit side. Therefore, credit the liability, Accounts Payable ----Canyon Office Supplies.
- 6. PAID CASH ON ACCOUNT January 9. Paid cash on account to Canyon Office Supplies, P 1,000.00 QUESTIONS FOR ANALYZING A TRANSACTION INTO ITS DEBIT AND CREDITS PART Which accounts are affected? → Accounts Payable --- Canyon Office Supplies and Cash. How is each account classified? → Accounts Payable ---Canyon Office Supplies is a liability account. Cash is an asset account. How is each classification changed? → Liabilities decrease. Assets decrease How is each amount entered in the accounts? → Liabilities decrease on the debit side. Therefore, debit the liability account. Accounts Payable ---Canyon Office Supplies. Assets Decrease on the credit side. Therefore, credit the asset account, Cash. ACTIVITY 2 Analyzing transactions into debit and credit parts Answer this activity in your note book. Refer to p. 32 of chapter 2 of your reference book. ANALYZING HOW TRANSACTIONS AFFECT OWNER’S EQUITY ACCOUNTS Received Cash from Sales January 10. Received cash from sales, P11,000.00. Questions for Analyzing a Transaction into its Debit and Credit Parts 𝑊ℎ𝑖𝑐ℎ 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑎𝑟𝑒 𝑎𝑓𝑓𝑒𝑐𝑡𝑒𝑑? → 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑆𝑎𝑙𝑒𝑠 𝐻𝑜𝑤 𝑖𝑠 𝑒𝑎𝑐ℎ 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑐𝑙𝑎𝑠𝑠𝑖𝑓𝑖𝑒𝑑? → 𝐶𝑎𝑠ℎ 𝑖𝑠 𝑎𝑛 𝑎𝑠𝑠𝑒𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡. 𝑆𝑎𝑙𝑒𝑠 𝑖𝑠 𝑎 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑡ℎ𝑎𝑡 𝑎𝑓𝑓𝑒𝑐𝑡𝑠 𝑜𝑤𝑛𝑒𝑟’𝑠 𝑒𝑞𝑢𝑖𝑡𝑦. 𝐻𝑜𝑤 𝑖𝑠 𝑒𝑎𝑐ℎ 𝑐𝑙𝑎𝑠𝑠𝑖𝑓𝑖𝑐𝑎𝑡𝑖𝑜𝑛 𝑐ℎ𝑎𝑛𝑔𝑒𝑑? → 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒. 𝑂𝑤𝑛𝑒𝑟’𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠. 𝐻𝑜𝑤 𝑖𝑠 𝑒𝑎𝑐ℎ 𝑎𝑚𝑜𝑢𝑛𝑡 𝑒𝑛𝑡𝑒𝑟𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠? → 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑑𝑒𝑏𝑖𝑡 𝑠𝑖𝑑𝑒. 𝑇ℎ𝑒𝑟𝑒𝑓𝑜𝑟𝑒, 𝑑𝑒𝑏𝑖𝑡 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡, . 𝐶𝑎𝑠ℎ. 𝑂𝑤𝑛𝑒𝑟’𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑖𝑑𝑒. 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
- 7. 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 owner’s equity. Therefore, credit the revenue account, Sales. Sold Services on Account January 12. Sold services on account to Main Street Services, p 5,000.00. Questions for Analyzing a Transaction into its Debit and Credit Parts Which accounts are affected? → Accounts Receivable ---Main Street Services and Sales How is each account classified? → Accounts Receivable---Main Street Services is an asset account. Sales is a revenue account that affects owner’s equity. How is each classification changed? → Assets increase. Owner’s equity increases.→ How is each amount entered in the accounts? → Assets increase on the debit side. Therefore, debit the asset account, Accounts Receivable ---Main Street Services. Owner’s equity accounts increase on the credit side. Revenue increases owner’s equity. Therefore, credit the revenue account, Sales. Paid Cash for an Expense January 12. Paid cash for communications bill for cell phone and internet service, P 800.00 Questions for Analyzing a Transaction into its Debit and Credit Parts Which accounts are affected? → Communications Expense and Cash How is each account classified? → Communications Expense is an expense account that affects owner’s equity. Cash is an asset account. How is each classification changed𝜏? → Owner’s equity decreases from an increase in expenses. Assets decreases. How is each amount entered in the accounts? - Owner’s equity accounts decrease on the debit side. An increase in expenses decreases owner’s equity. Expense accounts Have normal debit balances. Therefore, debit the expense account, Communications Expense. Assets decrease on the credit side. Therefore, credit the asset account, Cash. Received Cash on Account
- 8. January 16. Received cash on account from Main Street Services, P 2,000.00. Questions for Analyzing a Transaction into its Debit and Credit Parts Which accounts are affected? --- Cash and Accounts Receivable –Main Street Services How is each account classified? --- Cash is an asset account. Accounts Receivable--- Main Street Services is an asset account. How is each classification changed? --- One asset (Cash) increases and another asset (Accounts Receivable –Main Street Services) decreases. How is each amount entered in the accounts? ---Assets increases on the debit side. Therefore, debit the asset account, Cash. Assets decrease on the credit side. Therefore, credit the asset account, Accounts Receivable---Main Street Services. Paid Cash to Owner for Personal Use January 16. Michael Delgado withdrew equity in the form of cash, P 3,500.00 Questions for Analyzing a Transaction into its Debit and Credit Parts Which accounts are affected? --- Michael Delgado, Drawing and Cash How is each account classified? --- Michael Delgado, Drawing is an owner’s equity Account. How is each classification changed? --- Owner’s equity decreases from an increase in withdrawals. Assets decrease. How is each entered in the accounts? --Owner’s equity accounts decrease on the debit side. An increase in withdrawals decreases owner’s equity. Withdrawals account have normal debit balances. Therefore, debit the owner’s equity ac- count, Michael Delgado, Drawing. Assets decrease on the credit side. Therefore, credit the asset account, Cash. Activity 3. Answer Lesson Review on page 39. Check your understanding 2-3 Transactions Write all your activities in the notebook.
- 9. ASSESSMENT: Answer chapter 2 Exercises on pages 41 and 42 in a yellow pad. Insert this in your notebook upon submission. Take your time. Don’t be in a hurry.