Vocabulary: Analyzing Accounting Transactions

One tool that is used in accounting to help analyze transactions is a T account.

A T account serves as a visual aid to show which side of the equation or an account is being affected.

A business received cash for tutoring services.

Conclusion: Debit Cash and credit Sales.

A business paid cash to its owner for personal use.

Conclusion: Debit Drawing and credit Cash.

A business paid cash for Internet services.

Conclusion: Debit Internet Expense and credit Cash.

Debit refers to the amount recorded on the left side.

Credit is the amount recorded on the right side.

DRAWING

Drawing is an Owner's Equity account. Drawing transactions typically decrease owner's equity, so this account decreases on the credit side and increases on the debit side. It has a normal debit balance.

EXPENSES

Expenses is an Owner's Equity account. Expense transactions typically decrease owner's equity, so this account decreases on the credit side and increases on the debit side. It has a normal debit balance.

The normal balance of an account is the side of the account that increases when a transaction occurs. This term is used with the terms debit and credit to describe exactly how a transaction affects an account

For example, assets, being on the left (debit) side of the accounting equation, have a normal debit balance. Liabilities and owner's equity, being on the right (credit) side of the equation, have a normal credit balance.

What does the first digit in the account number 230 mean?

The account is located in the liabilities division of the ledger.

Each account is assigned a three-digit account number. The first digit indicates the ledger division where the account is located.

The next two digits show the account's location within that ledger division. Note that larger companies with more accounts could have account numbers of four or more digits.

a business paid cash for its electric bill

debit utilities (or electric) expense and credit cash

Given the chart of accounts below, what number would you assign to the new account Wellness Expense? 510 Advertising Expense 520 Rent Expense 530 Utilities Expense

540

ACCOUNTS PAYABLE

Accounts Payable is a Liability account. It decreases on the debit side and increases on the credit side, so it has a normal credit balance.

ACCOUNTS RECEIVABLE

Accounts Receivable is an Asset account. It decreases on the credit side and increases on the debit side, so it has a normal debit balance.

CAPITAL

Capital is an Owner's Equity account. It decreases on the debit side and increases on the credit side, so it has a normal credit balance.

CASH

Cash is an Asset account. It decreases on the credit side and increases on the debit side, so it has a normal debit balance.

A business sold services on account.

Conclusion: Debit Accounts Receivable and credit Sales.

Income Statement Accounts

For the income statement accounts, revenue accounts will start with numbers in the 400s and expense accounts will start with numbers in the 500s.

Analyze the following accounts

Identify the type of account, asset, liability, or owner's equity, and the normal balance side for each. Identify the type of account — the normal balance side for each.

Balance Sheet Accounts (100) Assets (200) Liabilities (300) Owner's Equity

Income Statement Accounts (400) Revenue (500) Expenses

INSURANCE

Insurance is an Asset account. It decreases on the credit side and increases on the debit side, so it has a normal debit balance.

a business paid cash to its owner for personal use

debit drawing and credit cash

What is occurring when accounts are arranged in the ledger and the chart of accounts is maintained and kept current?

file maintenance

6. income statement

financial statement used to report a company's income Example: This quarter's income statement shows that the company is making a profit.

5. file maintenance

procedures for arranging and maintaining accounts in a ledger Example: File maintenance is important for keeping financial records current.

8. normal balance

the side of an account that is positive or increases Example: The normal balance of an owner's capital account is on the right side because that is the side that increases.

(400) Revenue 410 Sales

(500) Expenses 510 Advertising Expense 520 Insurance Expense 530 Miscellaneous Expense 540 Rent Expense 550 Supplies Expense 560 Utilities Expense Expenses are arranged alphabetically as well.

.....

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Using T accounts helps you identify which side of an account increases and which side decreases when a transaction occurs. Remember to follow these two important accounting rules:

1. Account balances always increase on the normal balance side of an account. 2. Account balances decrease on the opposite side of the normal balance side of the account.

assets expenses liabilities owner's equity accounts revenue

100s 500s 200s 300s 400s

If a business only has two asset accounts, Cash and Supplies, what would the two accounts be numbered?

110 and 120

Given the chart of accounts below, what number would you assign to the new account Repairs Expense? 510 Advertising Expense 520 Rent Expense 530 Utilities Expense

525

a business sold services on account

debit accounts receivable and credit sales

Because asset accounts have a normal balance on the debit side, they increase on the debit side and decrease on the credit side.

Liabilities and owner's capital accounts have a normal balance on the credit side, so those accounts increase on the credit side and decrease on the debit side.

PETTY CASH

Petty Cash is an Asset account. It decreases on the credit side and increases on the debit side, so it has a normal debit balance.

SALES

Sales is an Owner's Equity account. It decreases on the debit side and increases on the credit side, so it has a normal credit balance.

SUPPLIES

Supplies is an Asset account. It decreases on the credit side and increases on the debit side, so it has a normal debit balance.

Analyze how the following transactions change owner's equity. Use the four transaction analysis questions to determine what accounts are being affected and how they are being affected.

Which accounts are being affected? How are the accounts classified? How is each account changing? Is it increasing or decreasing? On which side is the account changing? The left/debit side or right/credit side?

12. transaction

a business event that has a monetary impact Example: With each transaction, two accounts in the business are affected.

11. revenue

a business's income or sales Example: Revenue was up last month from the store's Black Friday sales.

4. expense

a cost associated with doing business Example: Common business expenses are payments for rent, electricity, Internet, and supplies.

10. T account

a graphical representation of an account Example: T accounts help business owners visualize how accounts are affected by each transaction.

7. ledger

an account or record used to record transactions in a business Example: The ledger contained all the accounts needed to complete the financial statements.

9. T account

an accounting tool used in analyzing transactions Example: Use a T account to visualize which side an account increases on.

3. debit

an entry on the left side of an account Example: In an accounting ledger, increases in assets are described as debits and are recorded on the left side of the account.

2. credit

an entry on the right side of an account Example: In an accounting ledger, decreases in assets are described as credits and are recorded on the right side of the account.

1. chart of accounts

an organizational tool used in accounting that lists all the accounts used in a business Example: Sara's chart of accounts listed all of her business's balance sheet and income statement accounts.

a business received cash for services

debit cash and credit sales