Lesson 3
Analyzing and Recording
Transactions
Task team of
Fundamental Accounting
School of Business,Sun Yat-sen University
2
Outline
?Accounts
?Detailed Description of Various
?Accounts
?T-Accounts
?Rules of Debits and Credits
?Double-entry Accounting
?Illustrated Application of Rules
3
Opening Story
?Do you have any idea about how your
parents keep an,account” of how much the
family spends?
?What a good family accountant!
4
Opening Story
?A global demand for accountants – where can the
“Big Four” find accountants with talent and
virtues?
?Mr.Land,E&Y British president (indirect quote)
In the recent 18 months,the shortage of accounting
talents has been scarcely satisfied,The most valuable in
the 21st century is accountants to special accounting
firms like us,（ 2005－ 7－ 21）
5
The Account
Cash
Accounting’s main summary device
is the account,the record of changes.
Accounts are grouped in 3 broad categories,
according to the accounting equation:
6
The Assets Account
Assets are the economic resources that
benefit the business now and in the future
Cash
Accounts receivable
Inventory
Notes receivable
Prepaid expenses
Supplies
Properties
Buildings
Equipment
7
The Liabilities Account
Liabilities are the debts of the company.
Notes payable
Accounts payable
Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)
8
The Equity Account
Stockholders’ (owners’) equity is the
owners’ claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for each
owner’s capital balance and withdrawals.
A corporation uses separate capital
accounts for each source of capital.
9
Details of Equity Account
Common Stock Retained Earnings
Dividends Revenues Expenses
10
The T-Account
Account Title
Debit
LEFT SIDE RIGHT SIDE
Credit
11
Increases and Decreases
in the Accounts
Accounting
Equation,Assets = Liabilities +
Stockholders’
Equity
Rules of
Debit and
Credit,Debit+ Debit– Debit–Credit– Credit+ Credit+
12
Rules of Debit and Credit
Air & Sea received $50,000 and issued stock.
Assets = Liabilities +
Stockholders’
Equity
Debit
for
Increase,
50,000
Credit
for
Increase,
50,000
Cash Common Stock
13
Rules of Debit and Credit
Air & Sea purchased land for $40,000 cash.
Common Stock
Bal,50,000
Cash
Creditfor
Decrease,
40,000
Bal,50,000
Land
Debitfor
Increase,
40,000
Assets = Liabilities + Stockholders’Equity
14
Expansion of the
Accounting Equation
+
Common Stock
+
Retained Earnings
–
Dividends
+
Revenues
–
Expenses
Assets
Stockholders’
Equity
Liabilities
15
Recording Transactions
?Record transactions first in the journal
(analyses)
?Ledger
?Posting
?Trial balance
16
Analysis of each transaction
?Identify the transaction from the source document,
such as a sales invoice or check stub
?Determine which accounts increase and which
decrease
?Apply the rules of debit and credit
?Enter the transaction in the journal,listing first
the debit and then the credit
?Verify that total debits equal total credits
17
A journal entry
?A journal entry would appear as follows:
Account Name XX (debit amount)
Account Name XX (credit amount)
Brief explanation of the transaction.
18
Ledger
?A group of accounts,
?All the accounts of a business grouped
together form a book called the ledger (or
general ledger),
19
Posting
?The process of copying (transferring) data from
the journal to accounts in the ledger.
?Debits in the journal are posted as debits to the
appropriate accounts; credits in the journal are posted
as credits to the appropriate accounts.
?All transactions must be keyed by date or number to
provide a link between the journal and the ledger.
?Ledger accounts appear after a series of transactions
have been posted and account balances calculated.
20
Trial balance
?The trial balance is a listing,in general
ledger order (assets,liabilities,then
stockholders’ equity),of the debit or credit
balance in each account
21
Transactions,Accounts and
Rules of Debits & Credits
1,Owners’ investment of cash increases both assets
and stockholders’ equity.
2,Purchase of an asset for cash increases assets
and decreases assets (no effect on total assets).
3,Purchase of an asset on credit (on account)
increases both assets and liabilities.
4,Receipt of cash for service revenue increases
both assets and stockholders’ equity.
5,Performance of services on account increases
both assets and stockholders’ equity.
6,Cash payment of expenses decreases both assets
and stockholders’ equity.
22
Transactions,Accounts and
Rules of Debits & Credits (cont)
7,Payment on account decreases both assets and
liabilities.
8,Personal transactions of the owner do not affect
the business,per the entity concept.
9,Collection of cash on account increases assets
and decreases assets.
10,Sale of an asset at a price equal to its cost
increases assets and decreases assets.
11,Declaration and payment of cash dividends
decreases both assets and stockholders’ equity.
23
?Do you still remember the example of
Beauty Photo Store? We are using it again
here!
?Remember always:
The accounting equation must remain in
balance after each transaction has been
recorded.
An Practical Illustration
24
?Wang Fang invests $30,000 cash to start her
business of Beauty Photo Store.
The accounts involved are:
(1)Cash (asset)
(2)Owner’s Equity (equity)
An Practical Illustration (cont)
25
Wang Fang invests $30,000 cash to
start her business.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
3 0,0 0 0$ -$ -$ -$ -$ 3 0,0 0 0$
3 0,0 0 0$ = 3 0,0 0 0$
An Practical Illustration (cont)
26
?Purchased supplies paying $2,500 cash,
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
An Practical Illustration (cont)
27
Purchased supplies paying $2,500 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
( 2 ) ( 2,5 0 0 ) 2,5 0 0$
2 7,5 0 0$ 2,5 0 0$ -$ -$ -$ 3 0,0 0 0$
3 0,0 0 0$ = 3 0,0 0 0$
An Practical Illustration (cont)
28
?Purchased camera and producing
equipment for the store for $20,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) equipment (asset)
An Practical Illustration (cont)
29
Purchased equipment for the store for $20,000 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
( 2 ) ( 2,5 0 0 ) 2,5 0 0$
( 3 ) ( 2 0,0 0 0 ) 2 0,0 0 0$
7,5 0 0$ 2,5 0 0$ 2 0,0 0 0$ -$ -$ 3 0,0 0 0$
3 0,0 0 0$ = 3 0,0 0 0$
An Practical Illustration (cont)
30
?Purchased supplies of $1,100 on account and
equipment of $6,000 by signing a note,
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts payable (liability)
(4) Notes payable (liability)
An Practical Illustration (cont)
31
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
( 2 ) ( 2,5 0 0 ) 2,5 0 0$
( 3 ) ( 2 0,0 0 0 ) 2 0,0 0 0$
( 4 ) 1,1 0 0 6,0 0 0 1,1 0 0$ 6,0 0 0
7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,0 0 0$
3 7,1 0 0$ = 3 7,1 0 0$
An Practical Illustration (cont)
Purchased supplies of $1,100 on account and
equipment of $6,000 by signing a note.
32
Now let’s look at transactions involving
revenues and expenses.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
B a l, 7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6000 3 0,0 0 0$
7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,0 0 0$
3 7,1 0 0$ = 3 7,1 0 0$
An Practical Illustration (cont)
33
?Performed wedding-photo and graduation
ceremony photo-taking services,receiving $2,200
cash.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
An Practical Illustration (cont)
34
Performed wedding photo-taking services,
receiving $2,200 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
B a l, 7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,0 0 0$
( 5 ) 2,2 0 0 2,2 0 0
9,7 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 2,2 0 0$
3 9,3 0 0$ = 3 9,3 0 0$
An Practical Illustration (cont)
35
?Paid rent for January,$1,000 and salaries to the
store’s employees,$700 cash.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
(Rent expense)
(3) Owner’s capital (equity)
(Salaries expense )
An Practical Illustration (cont)
36
Paid rent for the month,$1,000 and salary to
employees,$700 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
B a l, 7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6000 3 0,0 0 0$
( 5 ) 2,2 0 0 2,2 0 0
( 6 ) ( 1,0 0 0 ) ( 1,0 0 0 )
( 7 ) ( 7 0 0 ) ( 7 0 0 )$
8,0 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,5 0 0$
3 7,6 0 0$ = 3 7,6 0 0$
An Practical Illustration (cont)
37
?Provided wedding photo services of $1,600
and rented equipment for $300 to another
store,
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
(Sales revenue)
(3) Owner’s capital (equity)
(Rental revenue)
An Practical Illustration (cont)
38
Provided photo-taking services of $1,600 and rented
equipment for $300 to another store.
A s s e t s = L i a b i l i t i e s +
O w n e r 's
E q u i t y
C a s h
A c c o u n t
R e c e i v a b l e S u p p l i e s e q u i p m e n t
A c c o u n t s
p a y a b l e
N o t e s
P a y a b l e
O w n e r 's
c a p i t a l
B a l, 8,0 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,5 0 0$
( 8 ) 1,9 0 0 1,9 0 0
8,0 0 0$ 1,9 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 2,4 0 0$
3 9,5 0 0$ = 3 9,5 0 0$
An Practical Illustration (cont)
39
Received $1,900 cash on account,
The accounts involved are:
(1) Cash (asset)
(2) Account receivable (asset)
An Practical Illustration (cont)
40
Received cash of $1,900 on account.
An Practical Illustration (cont)
41
Paid $900 on account,
The accounts involved are:
(1) Cash (asset)
(2) Account payable (liability)
An Practical Illustration (cont)
42
Paid $900 cash on account.
An Practical Illustration (cont)
43
? Wang Fang withdrew $600 cash for
personal living expenses,
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
Withdrawals
An Practical Illustration (cont)
44
Wang Fang withdrew $600 for personal living expenses.
An Practical Illustration (cont)
A s s e t s = L i a b i l i t i e s +
O w n e r 's
E q u i t y
C a s h
A c c o u n t
R e c e i v a b l e S u p p l i e s e q u i p m e n t
A c c o u n t s
p a y a b l e
N o t e s
P a y a b l e
O w n e r 's
c a p i t a l
B a l, 8,0 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,5 0 0$
( 8 ) 1,9 0 0 1,9 0 0
( 9 ) 1,9 0 0 ( 1,9 0 0 )
( 1 0 ) ( 9 0 0 ) ( 9 0 0 )
( 1 1 ) ( 6 0 0 ) ( 6 0 0 )
8,4 0 0$ -$ 3,6 0 0$ 2 6,0 0 0$ 200$ 6,0 0 0$ 3 1,8 0 0$
3 8,0 0 0$ = 3 8,0 0 0$
45
Summary
? Accounts are used to appropriately categorize transactions.
? T-accounts are a simplified version used in practice.
? The type of account determines the side on which increases
and decreases are recorded; the rules of debit and credit
keep the accounting equation in balance
? In the double-entry accounting system,at least two
accounts are always affected by a transaction,After a
transaction is recorded,the accounting equation must
remain in balance.
? Economic transactions of a business will impact various
asset,liability,and/or equity accounts; but,they will not
disturb the equality of the accounting equation.
46
Case for Discussion
? In order for all accounts to look the same,and to simultaneously make
sure that the accounting equation stays in balance with double-entry
bookkeeping,the debit and credit system was devised,Luca Pacioli
first described it in 1494,and the basic system is so sound and efficient,
we still use it today,Tradition aside,we would not still be using this
ancient system if it did not work extremely well and efficiently,One
could set up a system with pluses and minuses,but it would not be as
efficient at generating the data needed for financial statements while
making sure that the accounting equation was still in balance,One is
more likely to make mistakes in entering data with plus and minus
signs,although this is a secondary concern to the
issues of uniformity and efficiency,
? Why use debits and credits rather than pluses and
minuses?
The End of Lesson 3
Analyzing and Recording
Transactions
Task team of
Fundamental Accounting
School of Business,Sun Yat-sen University
2
Outline
?Accounts
?Detailed Description of Various
?Accounts
?T-Accounts
?Rules of Debits and Credits
?Double-entry Accounting
?Illustrated Application of Rules
3
Opening Story
?Do you have any idea about how your
parents keep an,account” of how much the
family spends?
?What a good family accountant!
4
Opening Story
?A global demand for accountants – where can the
“Big Four” find accountants with talent and
virtues?
?Mr.Land,E&Y British president (indirect quote)
In the recent 18 months,the shortage of accounting
talents has been scarcely satisfied,The most valuable in
the 21st century is accountants to special accounting
firms like us,（ 2005－ 7－ 21）
5
The Account
Cash
Accounting’s main summary device
is the account,the record of changes.
Accounts are grouped in 3 broad categories,
according to the accounting equation:
6
The Assets Account
Assets are the economic resources that
benefit the business now and in the future
Cash
Accounts receivable
Inventory
Notes receivable
Prepaid expenses
Supplies
Properties
Buildings
Equipment
7
The Liabilities Account
Liabilities are the debts of the company.
Notes payable
Accounts payable
Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)
8
The Equity Account
Stockholders’ (owners’) equity is the
owners’ claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for each
owner’s capital balance and withdrawals.
A corporation uses separate capital
accounts for each source of capital.
9
Details of Equity Account
Common Stock Retained Earnings
Dividends Revenues Expenses
10
The T-Account
Account Title
Debit
LEFT SIDE RIGHT SIDE
Credit
11
Increases and Decreases
in the Accounts
Accounting
Equation,Assets = Liabilities +
Stockholders’
Equity
Rules of
Debit and
Credit,Debit+ Debit– Debit–Credit– Credit+ Credit+
12
Rules of Debit and Credit
Air & Sea received $50,000 and issued stock.
Assets = Liabilities +
Stockholders’
Equity
Debit
for
Increase,
50,000
Credit
for
Increase,
50,000
Cash Common Stock
13
Rules of Debit and Credit
Air & Sea purchased land for $40,000 cash.
Common Stock
Bal,50,000
Cash
Creditfor
Decrease,
40,000
Bal,50,000
Land
Debitfor
Increase,
40,000
Assets = Liabilities + Stockholders’Equity
14
Expansion of the
Accounting Equation
+
Common Stock
+
Retained Earnings
–
Dividends
+
Revenues
–
Expenses
Assets
Stockholders’
Equity
Liabilities
15
Recording Transactions
?Record transactions first in the journal
(analyses)
?Ledger
?Posting
?Trial balance
16
Analysis of each transaction
?Identify the transaction from the source document,
such as a sales invoice or check stub
?Determine which accounts increase and which
decrease
?Apply the rules of debit and credit
?Enter the transaction in the journal,listing first
the debit and then the credit
?Verify that total debits equal total credits
17
A journal entry
?A journal entry would appear as follows:
Account Name XX (debit amount)
Account Name XX (credit amount)
Brief explanation of the transaction.
18
Ledger
?A group of accounts,
?All the accounts of a business grouped
together form a book called the ledger (or
general ledger),
19
Posting
?The process of copying (transferring) data from
the journal to accounts in the ledger.
?Debits in the journal are posted as debits to the
appropriate accounts; credits in the journal are posted
as credits to the appropriate accounts.
?All transactions must be keyed by date or number to
provide a link between the journal and the ledger.
?Ledger accounts appear after a series of transactions
have been posted and account balances calculated.
20
Trial balance
?The trial balance is a listing,in general
ledger order (assets,liabilities,then
stockholders’ equity),of the debit or credit
balance in each account
21
Transactions,Accounts and
Rules of Debits & Credits
1,Owners’ investment of cash increases both assets
and stockholders’ equity.
2,Purchase of an asset for cash increases assets
and decreases assets (no effect on total assets).
3,Purchase of an asset on credit (on account)
increases both assets and liabilities.
4,Receipt of cash for service revenue increases
both assets and stockholders’ equity.
5,Performance of services on account increases
both assets and stockholders’ equity.
6,Cash payment of expenses decreases both assets
and stockholders’ equity.
22
Transactions,Accounts and
Rules of Debits & Credits (cont)
7,Payment on account decreases both assets and
liabilities.
8,Personal transactions of the owner do not affect
the business,per the entity concept.
9,Collection of cash on account increases assets
and decreases assets.
10,Sale of an asset at a price equal to its cost
increases assets and decreases assets.
11,Declaration and payment of cash dividends
decreases both assets and stockholders’ equity.
23
?Do you still remember the example of
Beauty Photo Store? We are using it again
here!
?Remember always:
The accounting equation must remain in
balance after each transaction has been
recorded.
An Practical Illustration
24
?Wang Fang invests $30,000 cash to start her
business of Beauty Photo Store.
The accounts involved are:
(1)Cash (asset)
(2)Owner’s Equity (equity)
An Practical Illustration (cont)
25
Wang Fang invests $30,000 cash to
start her business.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
3 0,0 0 0$ -$ -$ -$ -$ 3 0,0 0 0$
3 0,0 0 0$ = 3 0,0 0 0$
An Practical Illustration (cont)
26
?Purchased supplies paying $2,500 cash,
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
An Practical Illustration (cont)
27
Purchased supplies paying $2,500 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
( 2 ) ( 2,5 0 0 ) 2,5 0 0$
2 7,5 0 0$ 2,5 0 0$ -$ -$ -$ 3 0,0 0 0$
3 0,0 0 0$ = 3 0,0 0 0$
An Practical Illustration (cont)
28
?Purchased camera and producing
equipment for the store for $20,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) equipment (asset)
An Practical Illustration (cont)
29
Purchased equipment for the store for $20,000 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
( 2 ) ( 2,5 0 0 ) 2,5 0 0$
( 3 ) ( 2 0,0 0 0 ) 2 0,0 0 0$
7,5 0 0$ 2,5 0 0$ 2 0,0 0 0$ -$ -$ 3 0,0 0 0$
3 0,0 0 0$ = 3 0,0 0 0$
An Practical Illustration (cont)
30
?Purchased supplies of $1,100 on account and
equipment of $6,000 by signing a note,
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts payable (liability)
(4) Notes payable (liability)
An Practical Illustration (cont)
31
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
( 1 ) 3 0,0 0 0$ 3 0,0 0 0$
( 2 ) ( 2,5 0 0 ) 2,5 0 0$
( 3 ) ( 2 0,0 0 0 ) 2 0,0 0 0$
( 4 ) 1,1 0 0 6,0 0 0 1,1 0 0$ 6,0 0 0
7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,0 0 0$
3 7,1 0 0$ = 3 7,1 0 0$
An Practical Illustration (cont)
Purchased supplies of $1,100 on account and
equipment of $6,000 by signing a note.
32
Now let’s look at transactions involving
revenues and expenses.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
B a l, 7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6000 3 0,0 0 0$
7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,0 0 0$
3 7,1 0 0$ = 3 7,1 0 0$
An Practical Illustration (cont)
33
?Performed wedding-photo and graduation
ceremony photo-taking services,receiving $2,200
cash.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
An Practical Illustration (cont)
34
Performed wedding photo-taking services,
receiving $2,200 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
B a l, 7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,0 0 0$
( 5 ) 2,2 0 0 2,2 0 0
9,7 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 2,2 0 0$
3 9,3 0 0$ = 3 9,3 0 0$
An Practical Illustration (cont)
35
?Paid rent for January,$1,000 and salaries to the
store’s employees,$700 cash.
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
(Rent expense)
(3) Owner’s capital (equity)
(Salaries expense )
An Practical Illustration (cont)
36
Paid rent for the month,$1,000 and salary to
employees,$700 cash.
A s s e t s = Li a bi l i t i e s +
O w ne r ' s
E qui t y
C a s h S upp l i e s e qui pm e nt
A c c oun t s
P a y a bl e
N ot e s
P a y a bl e
O w ne r ' s
C a pi t a l
B a l, 7,5 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6000 3 0,0 0 0$
( 5 ) 2,2 0 0 2,2 0 0
( 6 ) ( 1,0 0 0 ) ( 1,0 0 0 )
( 7 ) ( 7 0 0 ) ( 7 0 0 )$
8,0 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,5 0 0$
3 7,6 0 0$ = 3 7,6 0 0$
An Practical Illustration (cont)
37
?Provided wedding photo services of $1,600
and rented equipment for $300 to another
store,
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
(Sales revenue)
(3) Owner’s capital (equity)
(Rental revenue)
An Practical Illustration (cont)
38
Provided photo-taking services of $1,600 and rented
equipment for $300 to another store.
A s s e t s = L i a b i l i t i e s +
O w n e r 's
E q u i t y
C a s h
A c c o u n t
R e c e i v a b l e S u p p l i e s e q u i p m e n t
A c c o u n t s
p a y a b l e
N o t e s
P a y a b l e
O w n e r 's
c a p i t a l
B a l, 8,0 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,5 0 0$
( 8 ) 1,9 0 0 1,9 0 0
8,0 0 0$ 1,9 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 2,4 0 0$
3 9,5 0 0$ = 3 9,5 0 0$
An Practical Illustration (cont)
39
Received $1,900 cash on account,
The accounts involved are:
(1) Cash (asset)
(2) Account receivable (asset)
An Practical Illustration (cont)
40
Received cash of $1,900 on account.
An Practical Illustration (cont)
41
Paid $900 on account,
The accounts involved are:
(1) Cash (asset)
(2) Account payable (liability)
An Practical Illustration (cont)
42
Paid $900 cash on account.
An Practical Illustration (cont)
43
? Wang Fang withdrew $600 cash for
personal living expenses,
The accounts involved are:
(1) Cash (asset)
(2) Owner’s capital (equity)
Withdrawals
An Practical Illustration (cont)
44
Wang Fang withdrew $600 for personal living expenses.
An Practical Illustration (cont)
A s s e t s = L i a b i l i t i e s +
O w n e r 's
E q u i t y
C a s h
A c c o u n t
R e c e i v a b l e S u p p l i e s e q u i p m e n t
A c c o u n t s
p a y a b l e
N o t e s
P a y a b l e
O w n e r 's
c a p i t a l
B a l, 8,0 0 0$ 3,6 0 0$ 2 6,0 0 0$ 1,1 0 0$ 6,0 0 0$ 3 0,5 0 0$
( 8 ) 1,9 0 0 1,9 0 0
( 9 ) 1,9 0 0 ( 1,9 0 0 )
( 1 0 ) ( 9 0 0 ) ( 9 0 0 )
( 1 1 ) ( 6 0 0 ) ( 6 0 0 )
8,4 0 0$ -$ 3,6 0 0$ 2 6,0 0 0$ 200$ 6,0 0 0$ 3 1,8 0 0$
3 8,0 0 0$ = 3 8,0 0 0$
45
Summary
? Accounts are used to appropriately categorize transactions.
? T-accounts are a simplified version used in practice.
? The type of account determines the side on which increases
and decreases are recorded; the rules of debit and credit
keep the accounting equation in balance
? In the double-entry accounting system,at least two
accounts are always affected by a transaction,After a
transaction is recorded,the accounting equation must
remain in balance.
? Economic transactions of a business will impact various
asset,liability,and/or equity accounts; but,they will not
disturb the equality of the accounting equation.
46
Case for Discussion
? In order for all accounts to look the same,and to simultaneously make
sure that the accounting equation stays in balance with double-entry
bookkeeping,the debit and credit system was devised,Luca Pacioli
first described it in 1494,and the basic system is so sound and efficient,
we still use it today,Tradition aside,we would not still be using this
ancient system if it did not work extremely well and efficiently,One
could set up a system with pluses and minuses,but it would not be as
efficient at generating the data needed for financial statements while
making sure that the accounting equation was still in balance,One is
more likely to make mistakes in entering data with plus and minus
signs,although this is a secondary concern to the
issues of uniformity and efficiency,
? Why use debits and credits rather than pluses and
minuses?
The End of Lesson 3
