Chapter 3 - Analyzing Business Transactions Using T Accounts

Normal Balance

Increase side of an account Debit: Assets Expenses Drawing Credit: Liability Revenue Capital

4) Set up T accounts for revenue and expenses

*Revenue* accounts increase owner's equity; therefore, increases are recorded on the credit side of revenue accounts. *Expenses* are recorded on the debit side of the expense accounts because expenses decrease owner's equity.

6) Prepare an income statement, a statement of owner's equity, and a balance sheet

-The income statement is prepared to report the revenue and expenses for the period. -The statement of owner's equity is prepared to analyze the change in owner's equity during the period. -Then the balance sheet is prepared to summarize the assets, liabilities, and owner's equity of the business at a given point in time.

7) Prepare a Trial Balance

1) Prepare heading 2) List accounts names in the order as they appear on the financial statements. -Assets -Liabilities -Owner's Equity -Revenue -Expenses 3) Enter the ending balance of each account in the appropriate Debit or Credit Column. 4) Total debits & Credits columns. 5) Verify to the totals match

Chart of Accounts

A firm's list of accounts is called its chart of accounts. Accounts are arranged in a predetermined order and are numbered for handy reference and quick identification. Typically, accounts are numbered in the order in which they appear on the financial statements. Balance sheet accounts come first, followed by income statement accounts.

Classification

A means of identifying each account as an asset, liability, or O/E

Footing

A small pencil figure written at the base of an amount column showing the sum of the entries.

Drawing Account

A special type of O/E accounts set up to records withdrawals

Trial Balance

A statement to test the accuracy of the total debits and credits after transactions have been recorded.

Transposition

An Accounting error involving misplaced digits in a number

Double-entry System

An Accounting system that involves recording the effects of each transactions as debits and credits

Permanent Account

An account that is kept open from one accounting period to the next (Balance sheet accounts - assets, liabilities, O/E )

Temporary Account

An account whose balance is transferred to another account at the end of an accounting period (Income Statement Accounts - Revenue, expense Statement of O/E Accounts - Drawing)

Slide

An accounting error involving a misplaced decimal point

Debit

Entry on the LEFT side of an account

Credit

Entry on the RIGHT side of an account

1) T-Accounts

T accounts consist of two lines, one vertical and one horizontal, that resemble the letter T. The account name is written on the top line. Increases and decreases to the account are entered on either the left side or the right side of the vertical line.

5) Prepare a trial balance from T accounts

The trial balance is a statement to test the accuracy of the financial records. Total debits should equal total credits.

3) Determine the balance of an account.

is the difference between the amounts on the two sides of the account.