Transaction analysis sheets are useful in learning how to record transactions, however they are...
-
Upload
laureen-paul -
Category
Documents
-
view
214 -
download
0
Transcript of Transaction analysis sheets are useful in learning how to record transactions, however they are...
Transaction analysis sheets are useful in learning how to record transactions, however they are impractical due to the large number of financial events that occur each day in a business.
A more efficient method to collect, record, and summarize these events is to keep a separate account for each item.
An account is a form in which changes caused by transactions are recorded.
A simplified form of this record is called a T-account.
Introducing T-accounts DEBIT CREDIT
Debit is the accounting term used for the left side of the account, Credit is the accounting term used for the right side of the account.
T-accounts are not needed in business but are often used by accountants for rough work when they analyze transactions.
A separate account is required or each asset, for each liability, and for the owner’s equity on the balance sheet.
The beginning, or opening amounts on the balance sheet are called balances.
Asset accounts have a normal DEBIT balance
to increase, debit the account
any ASSET account debit credit balance
increase decrease
Liability accounts have a normal credit balance
To increase, credit the account
any LIABILITY account
debit credit balance
decrease increase
The owner’s equity account has a normal credit balance
To increase, credit the account
owner’s equity account
debit credit
balance
decrease increase
Introducing ledgers A ledger is a group of accounts.
To open accounts in the ledger, these steps should be followed:
Place the account name in the middle of each account
Record the date and opening balance from the balance sheet on the appropriate side in the account.
Double-entry accountingOne of the most important principles in
accounting is that for every transaction, double-entry accounting requires that a debit amount equal to a credit amount must be recorded.
The total of the debit amount must always equal the total of the credit amount for each transaction.
Recording transactions in accountsStep 1: determine which accounts change in value
as a result of the transaction. (two or more accounts will change in value as a result of each transaction)
Step 2: identify the type of account that has changed. (asset? Liability? Or owner’s equity?)
Recording transactions in accounts Step 3: decide whether the change is an
increase or a decrease in the account.
Step 4: Decide whether the change is recorded as a debit or a credit in the account. (Note that the ledger must remain in balance.)
Transaction 1: Aug 2 Received $500 cash as
payments on membership dues owing. The two accounts that are affected are
Cash and Accounts Receivable. The Cash account is increased with a
debit The Accounts Receivable account is
decreased with a credit Cash Accounts Receivable
Aug 2 500 Aug 2 500
Transaction 2: Aug 5 Purchased $25 worth of office supplies from Central Supply Co., with 30 days to pay.
Office Supplies Accounts Payable
Aug 5 25 Aug 5 25
Transaction 3: Aug 5 Paid $705 now due to Equipment Unlimited for goods previously purchased but not paid for.
Accounts Payable Cash
Aug 5 705 Aug 5 25 Aug 2 500 Aug 5 705
Transaction 4: Aug 7 Purchased three new tennis trainers for $545 each (total $1635). A cash down payment of $535 was made. The remaining amount ($1100) is to be paid at a later date.
Training Equipment Cash Accounts Payable
Aug 7 1635 Aug 2 500 Aug 5 705 Aug 5 705 Aug 5 25
7 535 7 1100
Transaction 5: Aug 7 Owner invested an additional $5000 in the business.
Cash R. Millar, Capital
Aug 2 500 Aug 5 705 Aug 7 5000
7 5000 7 535
Calculating New Balances1. Add up the debit side of the account.
2. Add up the credit side of the account.
3. Subtract the smaller amount from the larger and place the answer on the larger side of the account. This is the new balance for the account.
Calculating New Balances Cash
Aug 2 500 Aug 5 705 7 5000 7 535 5500 1240
Balance 4260
Preparing a Trial BalanceA trial balance is prepared to verify that the total
debits are still equal to the total credits in the ledger.
The trial balance is a list of accounts with their current balances.
They are listed in the order that they appear in the ledger.
Two columns are required to prepare the trial balance, one for debits, one for credits.
The trial balance must have a heading.