Accounting Part 1

ItlAPTEt{ 3

Key Concepts

l. Property is anything of value t a person or business owns and therefore controls. Property is
ing, property appears in the records at the amount it cost the
measured in dollars. In ac legal rights to property and are also measured in dollars. The
and financial claims is shown in the following equation:
owner. Financial claims are t

relationship between prope

ROPERTY : FINANCIAL CLAIMS

2. As it is used in accounting, e term equities refers to the financial clpims on assets (property).
The two types of equities in business are

. creditors' financial claims, lled liabilities, and
r the owner's financial clai called owner's equity.

3. The accounting equation is E,TS: LIABILITIES + O\AN.{ER'S EQUITY

Property Financial Claims

I LIABILITIES + O\,TINER,S EQUITY

ASSETS I I
I I
I
I +
Items of value
by the business * + Financial claims
of owners
Financial claims
of creditors

4. A business transaction is an mic event that causes a change-either an increase or a
or owner's equity. The accounting equation remains in balance
decrease-in assets, liabiliti

after each transaction:

: Liabilities + Owne(s Equity

Cash Office Serge Toble(
in Bank
Trans. I Sts,ooo Equipment Capital
Trans.2 Sls,ooo
Balance s15,000 + 00
Trans. S
Balance s15,000 + +s600 +s600
+ s0oo: 0+ Sls,eoo

+Sj,000
-s5,000 +
+ :s600 Sis,ooo

5l8,600

64 Chapter 3 Summary

EttrAPTEt{ 3

The following table shows t effects of typical business transa on the parts of the
accounting equation.

Transaction Effects On:

Investment of cash by owne
Investment of property
Cash payment for office

equipment
Purchase of an asset on a
Sale of office equipment on

account
Make a payment on account
Record revenue from a cash
Record a cash payment for a

expense
Record a cash withdrawal bv

the owner

5. Use the following steps to a lyze a business transaction:

ANALYSIS tdentify l. ldentify the accounts affected. decrease for each account
2. Classify the accounts affected. remains in balance.
Classify !. Determine the amount of increase

+/- affected.

Bolonce 4. Make sure the accounting

Key Terms (p.s4) expense (p.60)
(p.s2) (p.so)
account (p.ss) financial claim (p.ss)
accounting equation (p.s4) investment (p.s2)
accounts payable (p.s1) liabilities (p.s7)
accounts receivable (p.s4) on account (p.s2)
(p.s1) owner's equity (p.so)
assets (p.s1) property (p.60)
(p.s2) revenue (p.62)
business transaction withdrawal
credit
creditor
equities

Chapter 3 Summary 65

ItlAPTErt 3

Check Your nding

l. Property and Financial
a. Define the terms
b. What is the relationshi between property and financial clai
2. Equities
a. Describe the relation ip between assets and equities.
b. Name the two tYPes equities in a business, and give an ple of an account that is

used for each tYPe' rts of the accounting

5. The Accounting Equ
a. What is the accounti equation?
b. Cive an examPle of account for each Part of the

4- Effects of Transactions
a. What is a business tra saction?
b. How does each of following transactions affect the three

equation? cash from personal savings accou t to the business.
cash from the business for Perso use.
Trans. l: Owner tran

Trans.2: Owner

Trans. 3: Purchased ipment on credit.
Trans. 4: Purchased for the first monthlY PaYment for
Trans. 5: lssued a

Transaction ent on the date of service for design
to pay the telePhone bill.
Trans. 6: Received
ts must be affected bY each busi transaction? Why?
Trans. 7: lssued a
process described in this chaPter to analyze business
5. Accounting Equation in

a. At least how manY
b. Describe the

transactions.

Apply Key Terms

Which of the following ter can be
considered assets? Which terms late to
liabilities? Which terms do not
ll easily
into either categorY?

I accounts PaYable on accou
I accounts receivable property
revenue
I credit withdr
I creditor
| "*p..rr.

Chapter 3 Review and Activit

Il{ApTtt{ 3

Explorin Electronic Spreads

Computer spreadsheets are i tant tools for organizing and analyzi data. A spreadsheet is made

up of rows and columns. The colum s are identified by letters and the s are identified by numbers,

As you create a spreadsheet, you will enter numbers, labels, and formulas cells. Microsoft@ Excel is

the most commonly used spreadsh application in the business world. T e following is an example of

a basic electronic spreadsheet:

Net income

Before you create a computer sp sheet, review the following spread t terms.

Spreadsheet Terms

tified by numbers down the left side

tified by letters along the top of the

tified by a column letter and row nu r. For example, the cell
ress 84 indicates the cell where the nu ber 1,800 is found.

ndicated by a dark border.

Scroll arrows llows you to view other parts of the sp

t that identifies columns or rows of in : cannot be used for
lculations.

umbers inserted in cells that can be used

thematical functions entered in a parti lar cell that tells the software

add, subtract, divide, or multiply values. -or example, EZ E3
-presents 10,000 3,550, or 6,450

Chapter 3 ComputerizedAccounting 67

I1{APTTt{ 3

5-4 Classifying Accounts

ts belong in one of the following clasSifications: Asset, Liability,

In your working papers, indicate the classification for each of

ng accounts.

Jones, Capital 6. Delivbry Equipment
in Bank 7. Camlbing Equipment
8. Buildling
Receivable 9. Land
s Payable
Equipment 10. Computer Equipment

A busi 5-5 Completing the Accounting Equation
missing
owned and operated by Mike Murray uses these accounts.

Look at the following list of accohnts, and determine the
ount for each of the question marks.

Assets : +Liabilities Owne/s Equity

in Bank S4,5oo Accournts Payable Mike Murray,
nts Receivable 1,550 Capital 59,250
?

Equipment 5,000

5-6 Classifying Accoplnts

Within the Accounting Equation

re are the account names and balancqs for Wilderness Rentals.

unts Payable $ 7,000 Cash [n Bank $ 5,000

urnrLtos IR\LLeL! cev sivvrLable 2utvv,v0OO Officd Equipment 3,000

ing Equipment 1.2,000 Ronald Hicks, Capital 15,000

Using these account names and balances:

and total the assets of the business.
:mine the amount owed by the business.
the amount of the owner's equity in the business.

Chapter 3 Problems

IrlAPTTt{ 3

Problem l-7 Determi I lncreases and

Hot Suds Car Wash uses the followi in Accounts

accounts:

Cash in Bank
Accounts Receivable
Office Equipment
Office Furniture
Car Wash Equipment

lnstructions Use a form similar to one that follows. For each

transaction:

1. Identify the accounts affected.
2. Classify the accounts.
3. Determine the amount of the crease (+) or decrease (-) for each

account affected. as an example.
The first transaction is com

Amount of Increase

+$25,000

+$2s,000

Transactions

Jan. 1 1. Regina Delgado, owner, invested $25,000 cash in

4 the business.
5
10 2. Bought car wash eq nt with cash for $12,000.

1,2 3. Purchased, on t, $2,500 of office equipment.

15 4. \A/rote a check for t monthly rent, $800.

20 5. Received cash for ices performed, $ 1,000.
6. The owner withd $600 cash from the business
25
for personal use.

7. Purchased a desk fo $1,000, paying $200 cash

and agreeing to pa the balance of $800 in 30 days.

8. Provided services $600 on account.

Chapter 3 Problems 69

IHAPII[ 3

5-8 Determining the Effects

of Transactions on the

Accounting Equation

After gr ing from college, Abe Shultz decided to start a pet grooming

servlce ca led Kits & Pups Grooming.

rns Use a form similar to the one that follows. For each of the
followi transactions:

1. Iden ify the accounts affected, using the account names on the form.

ine the amount of the increase or decrease for each account.

3. Wri the amount of the increase (+) or decrease (-) in the space under

each t affected.

4. Ont following line, write the new balance for each account.

5. Tra ction 1 is completed as an example.

Liabilities Owner's
Equity

Abe Shultz,
Capital

+$10,000

Transactions

Abe Shultz began the business by depositing $10,000 in
a checking account at the Shoreline National Bank in the
name of the business, Kits & Pups Grooming.
Bought grooming equipment fgr cash, $1,000.
Issued a check for $900 for the ponthly rent.
Bought $6,000 worth of new office equipment on account
for use in the business.
Received $700 cash for services performed for customers
during the first week of busineqs.
Issued a $2,000 check to the creditor as partial payment
for the office equipment purchased on account.
Performed grooming services ahd agreed to be paid for
them later, $500.

em I-9 Determining the, Effects

of Transactions on the

Accounting Equation

Juanita is the owner of a professional guide service called Outback

Guide V1CC.

Chapter 3 Problems

lnstructions Use a form similar to he one below. Complete these steps f IHAPTEtt 3

each of the following transactions: Step-by-Step lnstructions:
Problem 5-9
Identify the accounts affected.
l. Select the spreadsheet
Write the amount of the inc (+) or decrease (-) in the space
template for Problem
provided on the form in your 3-9.
2. Enteryour name and
3. Determine the new balance each account. the date in the spaces
provided on the
Liabilities template.
3. Complete the
Tiansactions spreadsheet using the
instructions in your
1. Ms. Ortega, the er, opened a checking account for working papers.
4. Print the spreadsheet
the business by iting $60,000 of her personal funds. and proofyourwork.
thly rent of $3,000. 5. Complete the Analyze
2. Paid by check the activity.
6. Saveyourworkand
3. Bought hiking equi ent for the business by writing exit the spreadsheet
Program.

a check for $3,000.

9 4. Purchased $24,000 f rafting equipment by writing a

check.

11 5. Purchased office eq ipment on account for $4,000.

15 6. Received payment r guide services, $2,500.

18 7. Ms. Ortega con ted a desk valued at $450 to the

business.

21 8. Withdrew $3,000 sh from the business for personal use.
26 9. Wrote a check to a reditor as partial payment on account

$ 1,500. r and agreed to accept payment late

30 10. Took a group on a

$1,200.

Problem 5-t0 Descri g Business Transactio

Showbiz Video is a business ow by Greg Failla. The transactions
follow are shown as they would a r in the accounting equation.

lnstructions In your working pa , describe what has happened in eac

transaction. Transaction 1 is compl ed as an example.

Example:

1. The owner invested $30,000 i

Chapter 3 Problems 7t

Owner's
Equity

Greg Failla,
Capital

Use the Problem 5-I I Completing the

Accounting Equation

nt names and balances forJob Connegt are listed below.

Determine the missing amount for each of the question marks.
in your working papers and write i4 the missing amounts.

tidbitities

Business Richard Tang,
Capital
Equipment

Hint: In ine 8, total assets are $ 18,000.

72 Chapter 3 Problems

ItIAPTEt{ 3

Practice vour test-t king skills! The questions on this page are reprinted with permission

from national o izations:

o Future Busi Leaders of America
nals of America
. Business

Use a separate s of paper to record your answe$.

Future Business of America
FBL\/ Mur,rrprn Cnorcn
1. Things of value business uses to generate income a known as

a. assets. c. expenses.

b. capital. d. revenue.

Business of America

Murrrprr Cnorcn , which of the following
2.If a customer ds in a payment on his account

statements is ?

a. One asset i reases and another asset decreases.

b. One asset i reases and one liability decreases.

c. One liabili decreases and owner's equity i

d. One liabili increases and owner's equity in

3. Use these t balances to complete the next two uestions:
Cash in Bank Amy Smith, ital $6,200.00
Accounts R le?$3,200.00 Amy Smith, Dr wing 1,000.00
Office Supplies ue 1,400.00
300.00 Boarding

Office Furniture 1,200.00 Grooming pense ?
1,800.00 Salaries Expe
tOffice Equipme Miscellaneous 300.00
? 200.00
Accounts Pava

If the balance i Accounts Payable is $2,000.00 and G ing Revenue is $400.00,

what is the cor balance for the Accounts Receivabl account?

a. $800.00 c. $2,000.00
b. $1,500.00 d. $2,500.00

4. Use the above in #3 to answer this question.

If the Accounts vable balance is $800.00 and G ing Revenue is $600.00,

what is the ba] ce in the Accounts Payable account?

a. $600.00 c. $1,200.00
b. $800.00 d. $2,000.00

5. If owner's equit is $25,500, and assets are $37,600, ilities are

a. $25,500.

b. $37,600.

c. $63,100.

d. $12,100.

Competitive
. Practice
. Concept

--ao1 Chapter 3 Wifining Competitive Events 73

'--!;.-

IHAPTEt{ 3

l

The Equaflon

1. What term identifies the owner's claims to assets of the business?
2. Does ow 's equity increase every time a businebs acquires a new asset?

Explain r answer.
3. You are lyzing transactions when you have tg answer the telephone. After

you finish he conversation, how can you tell wfether you completed the
tra you were working on when the pho4rie rang?
4. How is an Kpense similar to a withdrawal? Howris it different?
5. Describe a ies of transactions that could result]in negative owner's equity.
6. Assess the uae of the four-step procedure for adalyzing transactions.

cotuSTHDY Service Health and Fitness ]
The Fitness
er, owned by Gail Chan, has been in business for two years. The

business is I with its expanded hours of opJration.

You are a local business consultant and have w$rked with several other small

businesses i the area. Ms. Chan has asked you apout possible ways to obtain

money for n equipment. She has already borronled money from family mem-

bers and can :use them as a source of more fundp.

1. Evaluate ible sources of money for your cUeJrt. Use the Internet and
other sou to research alternatives with the Srhall Business Administration,
the Cha
r of Commerce, and local banks.
2. Make a li ]

disadvan of alternatives. Include costs, interest rates, and advantages or

3. Make a ).
4. Explain
rmendation to your client based oi Xour list of alternatives.

the additional money will affect the accounting equation.

Company

Many co nies provide office supplies for their employees' use while on the

iob.Imagi that you work for a large department ;tore like JC Penney. Several of
your co-wor :rs take company rrppir., itome for tllreir personal use, such as pens,

bags, hange , and boxes. You need boxes to stord some items at home, so you

consider them from the supply room.

Ernrcer, MaxrNc

1. What are ethical issues? 4. How do the alternatives affect the

2. What are e alternatives? partie$?

3. Who are affected parties? 5. What would you do?

Writing a
Using the

a new
example of
explanation

74 Chapter 3 Real-World Applica ns and Connections

ItlAPTII.t 3

Applying

}ltllv|HIt{$ Whether work in a small or large business, tec{nology is critical to efficiency

ltrunnnrffi& in the workp e.

ACCOUNYTflG ON rnrJon
After gradu ing from college and working for a year as a junior accountant in

a CPA firm, u decide to open an accounting buginess from your home. You'Il

need a I ter, software, and office furniture to get started. Complete the

activities bel$w to help you select the right software for your needs.

Iusrn

1. List the kifids of financial services you would like to provide.

2. Research tfrree accounting software packages thdt would help you deliver the

services y(u listed. List the name, price, system lequirements, and features of

each softr,rfare package. Use the Internet and othpr sources.

3. pSaelreacgt rtahpeh[leoxftpwlaairneinpgacwkahgyeytohuatsebleescttemdetehtsis your_anticipated needs. Write a
product.

Money the World

If vou were vacation in Mexico, you would pay fpr your lunch in pesos. Just as

different cou ries use different languages, they also use their own q/pe of money

or currencv. Lny countries in Europe use the eufo. India uses the rupee, and

China uses t yuan. If you were an accountant recording business transactions

in Switzerla , you would use Swiss francs.

INsrn Find a Web site on the Internet that lists world currencies. What

currencv ls u inJapan? In the United Kingdom?

Your Earning

Your future i will depend on various things including your career choice,

vour educati , and the region where you live.

Pnnsonq.r aNcn Acrrvrtv List three iobs that are in different fields and

different r ns of the United States. Use the Internet or your library to research

their educa n requirements and their salary ^ Iu[gehS]uu**,rt

ranges. Crea a table to organize the results of I Sports Property

your researc ] Lit<e manyindustries, a professional
I sport can have assets that are
PBnsor*.lr ONrrt*n Log on to I uniCue to its type of business' Visit

gl ntlng.glencoe.com and glencoeaccounting
Center. Click on Making It
click on Stu
select Chapter 3.
Personal a

,glencoe.com and click

on Student Center. Click on

WebQuest and select Unit 2 to

continue your lnternet project.

\--/n1 ._ Chapter 3 Real-World Applications and Connections 75

IHApTttt 4 Tra sactions Tliat Affect
As ts, Liabilitips, and

e/s Capital

What You'll Learn Predict

Prepare a chaft of accounts. L What does the chapter title tell you?

Explain the purpose of 2. What do you already know about this subject from personal experience?
double-entry accounting. 5. What have you learned about this in ihe earlier chapters?
+. What gaps exist in your knowledge oi this subject?
ldentify the normal balance
of accounts. Panda Restaurant Grodp

Use T accounts to illustrate When you think of a quick *"u1, do you think of Orange
the rules of debit and credit Flavored Chicken and Beef with Bloccoli? These are two of the
for asset accounts, liability Chinese food entr6es that Panda Ekpress serves quickly and
accounts, and the owner's conveniently. Panda Express is par[ of the Panda Restaurant
capital account and to express Group, owner of Panda Inn and H[bachi-San restaurants.
the accounting equation.
Andrew and Peggy Cherng operped their first Panda Inn
Use T accounts to analyze in Pasadena, California, using recipes from Andrew's father,
transactions that affect assets, Master Chef Ming-Tsai Cherng. Plnda Restaurant Group now
liabilities, and the owner's has more than 700 stores in 36 sta[es, Puerto Rico, and Japan.
capital account.
The Cherngs are on a mission to reach a goal of 10,000 Panda
Calculate the account Express restaurants. 'lhis means fiJOing new locations and
balances after recording buying a lot of kitchen equipment and dining room furniture.
business transactions.
What Do You Think?
Define the accounting terms ]
introduced in this chapter. When Panda Restaurant Group opens a new store, how do

Why Ifs Important you think its assets and liabilities are affected?

ln accounting you need to
analyze transactions into
debit and credit pafts.

Chapter 4 Transactions That Assets, Liabilities, and Owner's Capita]l

Business transactions occur around us every day.
A music store sells thousands of CDs. You may
stop by for a meal at a local restaurant. A cruise
ship line may buy new furniture for its dining
cabins. Successful businesses have hundreds,
even thousands, of transactions each day.
Analyzing and recording these transactions are
key duties of the accounting staff.

Personal Connection

l. What types of business transactions occur

in your workplace or the workplace of your
family or friends?

2. Who records these transactions into the

accounting records?

Online Connection

Co to glenroeaccounting.glencoe.(om and click
on Student Center. Click on Working in the
Real World and select Chapter 4.

r,--)_-a1r//-:-\-

$EIIilt t{ I Ac ounts and the Double-
En Accounting System
Main ldea
Chapter 3 you learned about the counting equation. In this
The double-entry accounting
system uses debits and chap er you will learn how to keep it in balance using the double-
credits. Debft means "left
side" and credif means entry counting system. When The Company records the dol-
"right side."
lat a ount of a transaction in one account it records an equal amount
Read to Learn...
1na her account. The same is true of a ll barbershop. In this and
> about the chart of
follo ing chapters, we discuss accounting a sole proprietorship.
accounts. (p.78)
Th Chart of Accounts
> about the double-entry
Is the Chart of Accounts
accounting system.
(p.78) chart of accounts is a list of all a nts used by a business. A

Key Terms smal business may require only 20 or 30 a counts, but a large one may

chart of accounts have thousand.
ledger
double-entry accounting R 11 that an account is a record of c nges and balances of a spe-
debit
credit cific sset, liability, or component of own equity. Accounts may have
T account
normal balance diffe nt physical forms, depending on the ystem. In a manual system,

each nt may be a separate page in a or a separate card in a tray.

Ina electronic system, accounts are sto on disks or hard drives.

hether a system is manual or elect nic, accounts are grouped

toget r in a ledger . The ledger is often to as the general ledger.

ing the books" refers to maintaining a nts in the ledger. Group-

ing a nts in a ledger makes informatio easy to find. Information is

t from the ledger and organized into nancial statements.
system for numbering accounts ma it easy to locate individual

ts in the ledger. Account numbers ave two or more digits used

for sorti g information based on the kinds reports the business needs.

A small ompany may use a three-digit system. A very large corporation may
use 35 r more digits. A typical numbering s m used to prepare a chart

ofa nts is as follows:

or{ accounts begin with 1.
lity accounts begin with 2.
.Li r's equity accounts begin with 3.
.Ow nue accounts begin with 4.
nse accounts begin with 5.
a

a

Dou le-Entry Accounti

IIow D o ubl e -Entry A c c ounfing

In hapter 3 you used the accounting uation fot analyzing and
recordi g changes in account balances. T s approach works well if a

78 Chapter 4 Transactions That A Assets, Liabilities, and Owner's Capital

Roadrunner t alivveBrylvSdelr*vti.c#e.F..,*

155 Ga cA 94230 ...', '.:, .
Sacramer
i
CHART OF ACCOUN
Cash in Bank
ASSETS r0 Accounts Receivable-City News
Accounts Receivable-Green Company
l0 Computer Equipment
Office Equipment
II Delivery Equipment
II
Accounts Payable-Beacon Advertising
12 Accounts Payable-North Shore Auto

12 Maria Sanchez, Capital
Maria Sanchez, Withdrawals
LIABITITIES 20 lncome Summary
20
Delivery Revenue
owNER',S EQUITY 30
30 Advertising Expense
30 Maintenance Expense
Rent Expense
REVENUE 40 Utilities Expense

EXPENSES 50

50
5I
5t

business has only a few accounts. It I ecomes awkward, however, if a busi-
ness has many accounts and many tr Lnsactions to analyze.

Accountants use the double-entt y accounting system to analYze and

record a transaction. Double-entry acc( unting recognizes the different sides of
business transactions as debits arrd credii s. A debit is an entry on the left side of

an account. A credit is an entry on th( right side of an account. This system is

more efficient than updating the accor Lnting equation for each transaction.

T Accounts

An efficient tool for using doul rle-entry accounting is a I account.

The T account, so called because of its T shape, shows the dollar increase Chart of Accounts
A chart of accounts is
or decrease in an account that is cau red by a transaction. T accounts help organized as a table.
What other tables have
the accountant analyze the parts of a business transaction. you worked with?
As in the illustration here, a T acc tunt has an account name, a left side,

and a right side. The account name i at the top of the T. The left side of T
accounts is always used for debit amot nts.
Account Name

The right side of T accounts is always' rsed Left Side I RiSht Side
Debit side I Credit Side
for credit amounts. The words debit and
credit are simply the accountant's t( rms I Creait
for left ard right. Accountants somet mes
Debir I
use DR for debit and CR for credit.
I

The Rules of Debit and C

Debits and credits are used to re :ord the increase or decrease in eact
account affected by a business tranl lction. Under double-entry account
ing, for each debit entrY made in ont account, a credit of an equal amoun
must be made in another account. D lbit and credit rules vary according t<

whether an account is classified as an asset, a liability, or the owner's capita

Section 1 Accounts and the Dou -Entry Accounting SYstem

account Regardless of the type of account, fiowever, the left side of an
account s always the debit side and the right qide is always the credit side.

Eac account classification has a specific side that is its normal bal-

ance sl . An account's normal balance is always on the side used to

record i to the account. The word notmal used here means usual.

Debit and Credit The Throug this book, note that the normal toalance side of each account
terms debif and credit
might remind you of is shad
debit cards and credit
cards. ln accounting Ru for Asset Accounts. Asset accounts follow three rules of
debit simply means the
left side of an account debit a credit:
and credit means the
right side. 1. asset accoun t is increased (+) on the (tebitside (left side).

2. asset accountis decreased (-) on thd. credit side (right side).

3. normal balance for an asset account is the increase, or the debit
ide. The normal balance side is shade( in the following T account.

Not that assets appear on the left side qf the accounting equation.

:ASSETS LIABILITIES + OWNER'S EQUITY

Asset Accounts

(1) r

S

(3)

For sset accounts the increase side is the depit (left) side of the T account.

The side is the credit (right) side of tfe T account. Notice the (+)

(-and signs that are used to indicate the increase and decrease sides of the

accoun . They do not mean the same thing ad debit and credit.

Sin the increase side of an asset account is always the debit side, asset

accoun have a normal debit balance. For e4ample, in the normal course

of busi ess, total increases to assets are larger than or exceed total decreases.

Business Practices Cash in Bank You would expect an asset account, then,
Giving business gifts to have a ndrmal debit balance.
internationally can be Credit
tricky. Some cultures Let's apply these rules to an actual
aftach meaning to
certain gifts and 200 70 asset accoupt. Look at the entries in the
colors. For example, 150 40 T account fgr Cash in Bank shown here.
in Japan, white
chrysanthemums 3s0 110 The increases in the account are recorded
are used only for
funerals. Bal- 240 on the left, br debit, side. The decreases in

the account are recorded on the right, or

credit, ide. Total debits equal $350 ($200 + $150). Total credits equal $110
($70 + $40). To find the balance, subtract total credits from total debits

($3s0 $110). The debit balance is $240.

R es for Liability and Owner'$ Capital Accounts. The

rules debit and credit for liability and the dwner's capital account are:

1. Liability and owner's capital accounts are increased on the credit

(right) side.

2. Liability and owner's capital accounts are decreased on the debit (left)

side.

3. The normal balance for liability and oilrner's capital accounts is the

increase, or the credit side.

80 Chapter 4 Transactions That A t Assets, Liabilities, and Owner's Capital

To illustrate these rules, let's look gain at the accounting equation and
the T accounts. Remember, the nor I balance side is shaded.

Assets Credit Credit
+ +
Debit
+ (1) Inoease (1) Increase
Side Side
Increase
Side (3) Normal (3) Normal
Balance Balance
Normal
Balance Debit and Qedtt Debit
and credft are neutral
For all three types of accounts, th debit side is always the left side of the terms that have no
relation to "good" and
T account, and the credit side is alw the right side. Notice, however, that "bad." Debit means "left
side" and cred# means
the increase (+) and decrease (-) si of the liability and owner's capital "right side."

accounts are the opposite of those assets. This difference exists because 81

accounts classified as liabilities and ner's capital are on the opposite side

of the accounting equation from a unts classified as assets. As a result,

debit and credit rules on one side the accounting equation-and the

T accounts within it-are mirror ima of those on the other side.

Let's apply these rules to actual unts. First, look at the entries in

the T account below for the liability nt Accounts Payable. Increases

are recorded on the right, or credit, . The decreases are recorded on the

left, or debit, side. Total credits equal 375 ($200 + $175); total debits equal

$175 ($100 + $75). To find the bala ce, subtract the total debits from the

total credits ($375 - $175). The cred balance is $200.

Credit
+
200
175

375

Bal. 200

Now look at the entries in the T ,r the owner's
Maria Sanchez, Capital. Remember Lles of debit at
capital account are the same as th rility account
n the right, c
lncreases to owner's caPital are ft, or debit, s
the account. Decreases are recorded subtract the tota
account has a normal credit balance. redit balance of

total credits ($4,000 - $550), you ha

Credit
+
1,500
2,500
4,000

Bal. 3,450

stITtIN I

Reinforce the Main ldea

Create a chaft like this one to
summarize the rules of debit
and credit. Fill in each blank
box with the word debit or the
wordcredit.

Do the Math

During the month of mber, PorembaPizzawrote checks tolahng $4,800. Two-thirds of

this amount was used to urchase a computer for cash. The rerrlaining amount was used to

pay afi outstanding invoi e for kitchen equipment purchased frqm Restaurant City.

1. List the account(s) ited and the debit amount(s).

2. List the account(s) ted and the credit amount(s).

Problem 4-I the Rules of Debi! and Credit

Speedy Appliance Repair owned by R. Lewis, uses the following accounts:

General Ledger
Cash in Bank
Accounts Receivab
Office Equipment
Accounts Payable
R. Lewis, Capital

lnstructions In the provided in your working papers:

1. Classify each accou as an asset, liability, or owner's capital account.

2. Indicate whether the ncrease side is a debit or a credit.

3. Indicate whether the side is a debit or credit.

4. Indicate whether the rmal balance for the account is a debit or credit balance.

The Cash in Bank t is completed as an example.

82 Chapter 4 Transactions That Assets, Liabilities, and Owner's Capital

$ E ['Tl ,[ ]l ,rI Ap lying the Rul
of ebit and Cre

Now that you are familiar with t e rules of debit and Main to analyze transactions.
credit for asset, liability, and owner's apital accounts, you
can use those rules to analyze busin transactions. Use T acc

Business Transactio Analysis Read Learn...

IIow Do You Analyze method for analyzing

Whether a business is buying a new computer sys- tions. (p. 83)
tem, paying its utility bills, or recei ng money for sales,
the accountant must analyze how t transaction should > howto apply the method to asset, liability,
be recorded. When analyzing busin transactions, you
should use the following step-by-ste s capital transactions. (p. 85)

B U.SINESS T RAN SAC TI ON A NAI

ANALySIS tdentify the accounts affected. for each account
ifv the accounts affected.
Classify termine the amount of increase or d

+/-

DEBIT-CREDIT RULE ich account is debited? For what amou
ich account is credited? For what a

t is the complete entry in T-account
Account Name

Asset and Equities ansactions

How Do You Use T Accouttts Assets and Equlties?

The business transactions that low are for Roadrunner Delivery Ser-
vice. Throughout the next several , you will learn how to analYze each

Section 2 Applying th Rules of Debit and Credit 83

Property and Roadru transaction, apply the rules of de$it and credit, and complete
the ent in T-account form. The T accounts derponstrate the effects of trans-
FinancialClaims actions n the accounting equation. A debit ip one account is offset by a
credit in mother account. Refer to the Roadrunher chart of accounts on page
assets : propefi
:equities creditors' 79. accounts will be used to analyze sevdral business transactions.

claims and Owne/s Capital

+ owner's Busi Transactions 1 and 2 use T accounls to illustrate owner's invest-
ments i the business.
claim

On October 1 Maria Sanchez took 25,000 from personal savings and deposifed that amount to open a

business checking account in the name f Roadrunner Delivery Service.

ANALYSIS tdentlfy accounts Cash in Bank and Maria San[hea Capital are affected.
in Bank is an asset account. Maria S{nchez, Capital is an owner's
Clossify rl account.
in Bank is increased by $zs,ooO. fUarla Sanchez, Capital is
+/-

DEBIT-CREDIT RULE 4. in asset accounts are recorded ad debits. Debit Cash in Bank

5. $25,000.
reases in the owne/s capital account arE recorded as credits. Credit
ria Sanchez, Capital for $25,000.

Cash in Bank aria Sanchez, Capital

On October 2 Maria Sanchez took telephones valued at $200 each ftom her home and
transfered them to the business as

ANALySIS tdentify l. accounts Office Equipment and Maril Sanchez, Capital are
Clossify 2.
+l- l. Equipment is an asset account. Maria Sanchez, Capital is an
s capitalaccount.
Equipment is increased by $400. niaria Sanchez, Capital is

Chapter4 TransactionsThat Assets, Liabilities, and Owner's Capital

RULEDEBIT-CREDIT 4. lr :reases in asset accounts are recorded i ; debits. Debit office

E luipment for $400.

5. lr :reases in owner's capital accounts are r :corded as credits. Credit

t! aria Sanchez, Capital for $400.

T ACCOUNTS -5. Office Equipment laria Sanchez, Capital
Debit
+ Credit
+
400 400

Assets and tiabilities

The following examples show changes to assets and liabilities ir:

T-account form:

o Business Transaction 3: increases an asset and decreases another asset Transactions How are
. Business Transaction 4: increases rn asset and increases a liability Business Transactions 2
. Business Transaction 5: increases rn asset and decreases another asset and 5 similar? How are
. Business Transaction 6: decreases a liability and decreases an asset they different?
o Business Transaction 7: increases an asset and decreases a liability

: tTFlTiYifFI l-f;Tr f*I{ r

On October 4 Rosdrunner issued t heck L01 for $3,000 to buy a computer s stem.

ANALYSIS tdentify t.T e accounts Computer Equipment and ash in Bank are affected.

Clossify 2.C rmputer Equipment and Cash in Bank rre asset accounts.

+/- 5.c rmputer Equipment is increased by $3, 00. Cash in Bank is

d rcreased by $3,000.

DEBIT.CREDIT RULE 4. lr creases in asset accounts are recorded t ; debits. Debit Computer

-E ;uipment for $3,000.

5.0 )creases in asset accounts are recorded rs credits. Credit Cash in

B rnk for $3,000.

T ACCOUNTS ;-l--- -6. Computer Equipment Cash in Bank
+l Credit
,i, 3,000 3,000
|
ffi

Section 2 Applying t Rules of Debit and Credit 85

On October 9 Roadrunner bought a truck on account from North Shore Alto for $12,000.

ANALYSIS tdentify

Auto are affected.
ry Equipment is an asset account. Acfounts Payable-North
Auto is a liability account.

Equipment is increased by $12,00d. Accounts Payable-
Shore Auto is increased by $12,000.

DE,BIT-CREDIT RULE 4. in asset accounts are recorded as debits. Debit Delivery
for $12,000.
5.
in liabilityv accounts are recorded ab credits. Credit Accounts

North Shore Auto for $12,000.

Delivery Equipment

On October 1L Roadrunner sold phone on accountto Green Company for $200.

ANALYSS tdentify accounts Accounts Receivable-Greeq Company and Office
ioment are affected.

Receivable-Green Company is hn asset account. Office

ipment is also an asset account.

ounts Receivable-Green Company is increased by $200. Office
ipment is decreased by $200.

DEBIT-CREDIT RULE 4. in asset accounts are recorded asjdebits. Debit Accounts

5. e-Green Company for $200.
in asset accounts are recorded al credits. Credit office

Accounts Receivable-
Green Company

Chapter 4 Transactions That Assets, Liabilities, and Owner's Capital

r

On October 72 Roadrunner mailec Check 102 for $350 as the ftrst installmt fi payment on the truck
purchased from North Shore Auto on C :tober 9.

ANALySIS tdentify l. Tl e accounts Accounts Payable-North S rore Auto and Cash in Bank
Classify
+/- al l affected.

2. A counts Payable-North Shore Auto is I liability account. Cash in

B nk is an asset account.

5. A counts Payable-North Shore Auto is r ecreased by $550. Cash in

B nk is decreased by $550.

DEBIT-CREDIT RULE -D creases in liability accounts are recorde as debits. Debit Accounts

T ACCOI.]NTS Pi yable-North Shore Auto for $35o.
5. D creases in asset accounts are recorded s credits. Credit Cash in

B nk for $350.

f

6. Accounts Payable- Cash in Bank

--__r_-North Shore Auto -]-=;

Debit I I ,io

3so I
I

r
On October 14 Roadrunner receive t and deposited a checkfor $200 from Gr, m Company. The check is full
payment for the telephone sold on accc tntto Green Company on October 11.

ANALYSIS tdentifY I. TI e accounts Cash in Bank and Accounts Receivable-Green

Clossify c mpany are affected.

+/- 2.C sh in Bank is an asset account. Accoun s Receivable-Green

c mpany is an asset account.

5.C sh in Bank is increased by $200. Accou rts Receivable-Green

c 'mpany is decreased by $200.

DEBIT-CREDIT RULE -4. lr rreases in asset accounts are recorded a rdebits. Debit Cash in Bank

fc '$200.
5. D rcreases in asset accounts are recorded s credits. Credit Accounts

R rceivable-Green Company for $200.

..-

T ACCOTINTS 5. \ccounts Receivable-
Green Company
;--T--Cash in Bank
Credit
+l
200
200 I

Section 2 Applying t Rules of Debit and Credit 87

stIIt[]l 2

Reinforce the Main Idea

lmagine that you have
your own business. Write
a description of a typical
transaction your business
would have. On a sheet of
paper, express the same
transaction in T-account form.

Do the Math

Diane Hendricks always dreamed of owning a recording rt.]alo. On February 1 Diane

withdrew $10,000 from personal savings and deposited it irl a new business checking

account for Hendricks . On February 2 Hendricks So{rnd made a $2,000 down

payment on equipment cost $8,000. The remaining balance will be paid at a later date.

What is the accounting uation for Hendricks Sound after these transactions?

Problem 4-2 lncreases and
in Accounts
Alice Roberts uses the fo
g accounts in her business:

General Ledger Office Equipment
Cash in Bank Accounts Payable
Alice Roberts, Capital
Accounts Receivab
Office Furniture

Instructions Analyze h of the following transactions. In your working papers, explain

the debit and the credit. se the format shown in the "*u-p1".

Example: invested $5,000 of her o* .rror.j, in a business called Roberts
OnJune 2 Alice

Employment Agency.

a. The asset account Cash in Bank is increased. Increases irl asset accounts are recorded

as debits.

b. The owner's ca I account Alice Roberts, Capital is intreased. Increases in the

owner's capital nt are recorded as credits.

a computer on account from Computer Inc. for $2,500.
ed a desk (Office Furniture) to the business. The desk is

50.

3. Made a rtial payment on account of $1,000 to Computer Inc.

88 Chapter 4 Tiansactions That A Assets, Liabilities, and Owner's Capital

+1& e#' q' qtix..

r! ,+ jf .a;

i i:

.16' .a!
,i.,,,'-*
.ff irrfje
i:i

&fflm*' ..;'- !

.4

+::i.'ar7l,:i- .!ir

...-:+*.....+ ;4!!;!r'

AccouttnNG rsity, Florence, South Ca
Francis Marion Un Tips from :'; '
Tim Lowder
University Small Business
Q: Doyouhaveother

besides teaching

A: Yes, lalso workwith

Development Center an Florence-Darlington Technical "ll:'f"gi-,.*!n;ti9x1';l1'.':Xff,f,lil,'*
College.lam also a ma

Q: What factors have key to your success? :}#',:';l.$:?lii{il,;h

A: l've realized that you put allyour faith in the short term.
a long-term vision and identify what
To succeed, you must

steps you must take to

Q: What do you like ilH#?Ji'i5;'.Tl'L

A: I like knowing that l've I a positive impact on students. As a H:li t;;omes avalabre'

consultanf I enjoy helpi my clients improve their companies.
Teaching and consulti are the most rewarding pursuits l've

ever undertaken.

Qr lilhat advice do have for accounting students
beginning their
d as possible. Accounting is integrated
A: Cet as broad a so you need to gain experience in thi

information systems, ing, and financial management.

Q: llllhat advice do have for accounting students
youl Gareer Path?
A: No matter what career
choose, you must do something
it. Start thinking early a
t the education and certifications

Create lesson plans and exams, teach sses, advise and motivate

A master's or doctoral d in accounting or a related

field. Relevant work and certifications can someti be substituted for an

advanced degree. A license is an example of a certifi

; Time management skills, munication skills, and

interpersonal skills.

Salary Range: $3 to $90,000 depending on expe size of educational

institution, and

Career Path: an advanced degree in accounting or a field, or gain relevant

work experience. become a graduate teaching assi or part-time professor.

Chapter 4 counting Careers in Focus

IrlAPTEt{ 4

Key Concepts

1. A chart of accounts is a list of ll accounts that a business uses. Each account is assigned a
number, and the accounts a listed in numerical order.

2. Double-entry accounting is a ystem that recognizes the different si(es of business transactions
as debits and credits:

. debit: an entry on the left of an account

o credit: an entry on the ri side of an account

This system is more efficient han updatins the accounting equatiori after each transaction, as
we did in Chapter 3.

3. An account's usual balance is lled its normal balance.

An asset has a normal debit nce:

. The increase side is the (left) side.

o The decrease side is the (right) side.

Asset Rule: Asset Accounts

Debit crddit
lncrease
tf"Decrease
Side
+

Normal
Balance

Both a liabitity account and he owner's capital account each have d normal credit balance:

o The inuease side is the (right) side.
f (left) side.
. The decrease side is the

Liabilitv Owner's Liabilitv and Owner's
pital Rule: Capital Accounts

Debit Cledit

Decrease Increase
Side
dia"
+

Ngrmal

Balance

4. Use debit and credit rules to increases and decreases in accounts.

Assel s Liabilities Owner's Equity

Debit Credit Debit Credit
+ +
I (2) Decrease
(1) Increase Side (1) Increase
Increase
Side Side Side

Normal (3) Normal (3) Normal
Balance Balance Balance

90 Chapter4 Summary

II{APTErt 4

5. Use a six-step method to a lvze a transaction:

B US/NESS T RAN SAC T ION ANAI SIS; Sfeps to Success

ANALYSIS tdentify t. the accounts affected. for each account
Classify 2. the accounts affected.
+/- 5. ine the amount of increase or

DEBIT.CREDIT RULE 4. account is debited? For what a
account is credited? For what a
5.

is the complete entry in T-account Account Name
Account Name

6. Accountbalances are calcu ted by following the rules of debit a

Accounts Payable

Debit Credit
+
100 200
75 t75
37s
775
al. 2OO

Key Terms (p. 78 ledger (p. 78)
(p.7e normal balance (p.80)
chart of accounts (:p.7e T account (p.7e)
credit
debit (p.7
double-entry
accounting

Chapter 4 Summary 9l

ItlAPTtr{ 4

Check Your U
l. Chart of Accounts
a. What is a chart of accou
b. Why are the accounts num
2. Double-EntryAccounting
a. What is double-entry
b. Define the terms debit and
5. Normal Balances
a. What is meant by the term
b. What is the normal
for asset accounts? For liability accounti? For the owner's

capital account?

4. T Accounts
a. What is the purpose of a T
b. Name the three basic
of a T account.

Transaction Analysis to analyze a business transaction?

a. What are the six steps
b. Explain briefly what is

A debit of $loo to Cash in

6. Account Balances

a. How do you determine balance of an account?
b. The following information for the Cash in Bank account on a single day.

What is the balance of in Bank at the end of the day?

Beginning balance: $

Transactions:

$.I,

$t

Apply Key Terms needs help
ting
Your boss at Hillside Nu
understanding the double-entry below, draft a list
system. Using the key terms lis t would help in

of definitions and illustrations t

your explanation.

chart of accounts I balance
credit
debit
double-entry accounting

Chapter 4 Review and Activi

ItlApTtll 4

lntroduction to mputenzed Accou ng Systems

Making the Transition a Manual to a Comp System

Manual Methods Transactions are to the appropriate screen in

. Transactions are recorded into jou s by hand. the accounting
. The details of each transaction are t n posted in the
Posting to the gene I ledger accounts occurs
general ledger.
automatically.
. The accountant computes account lances and
The accounting sys generates the trial balance.
prepares a trial balance to verify that he accounting
equation is still in balance. Financial reports pul the appropriate accounts

r Account names and balances are the transferred and their current ba from the general ledger

to the proper financial report and t report is computer files. The automatically summarize

summarized (totaled). and can be printed the user chooses.

What types of I iournal entries
and cash receipts
transactions can ases and cash payments
tory adjustments
be entered in I entries

Peachtree Complete@ iles bank statements
Accounting? res financial reports automatically
s checks and invoices
What else will
the accounting period
Peachtree do for the cash, collections, and payment man
accountant?

ent charts and graphs

EeuickB ks'e&A

What types of I journal entries
and cash receipts
transactions can be
and cash payments
entered in QuickBooks@ tory adjustments

Pro? bank statements
financial reports automatically
What else will checks and invoices
the accounting period
QuickBooks@ do for the sales, collections, and payables charts
accountant?

Chapter 4 ComputerizedAccounting 93

EtlATTTt{ 4

4-! Identifying Accounts Affected

by Transactions

owns Wilderness Rentals and uses lhe following accounts in

Ledger 207 Accbunts Payable-
Cash in Bank Advpnture Equipment Inc.
Accounts Receivable-
301 Roriald Hicks, Capital
Helen Katz
Office Equipment
Camping Equipment

For each of the following

te the two accounts affected.
te whether each account is

or credited.

Mav 1L Sold on account to
Helen Katzanunneeded
office typewriter.
Purchased camping

equipment on credit
from Adventure
Equipment Inc. Payment

is due within 30 days.
Ronald Hicks brought
a filing cabinet from
home and transferred it
to the business (Office
Equipment).

Purchased tents and
sleeping bags for cash.

Chapter 4 Problems

Problem 4-4 Using T Hot Suds Car Wash. She uses the

Analyze

Regina Delgado owns a business
following accounts:

General Ledger Accounts Payable-
101 Cash in Bank Allen Vacuum Systems
110 Accounts Receivable- Regina Delgado, Capital
VaIIey Auto
125 Office Equipment
130 Office Furniture
135 Car Wash Equipment

lnstructions For each transaction

1. Determine which accounts a nts affected.
2. Prepare T accounts for the a
3. Enter the debit and credit a nts in the T accounts.

May 5 1. Regina Delgado an additional $40,000 cash in h

12 business.
77
24 2. Bought another ca wash system on account for $27,OOO
29
from Allen Vacu Systems.

3. Regina Delgado tra ferred some of her personal office

furniture, valued a $3,750, to her business.

4. Hot Suds Car purchased additional office equipme

for $7,500. Payme t was made by check.

5. Hot Suds Car sold some surplus car washing

equipment on nt to Valley Auto for $1,200.

Chapter 4 Problems 95

ItlAPIEtt 4

4-5 Analyzing l?ansadions into Debit
and Credit Parts

i

Abe Shult owns Kits & Pups Grooming and uses the following accounts:

Ledger 205 Acc$unts Payable-
Cash in Bank Dogs & Cats Inc.
Accounts Receivable-
Martha Giles 301 Abe Shultz, Capital
Office Equipment
Office Furniture l
Grooming Equipment I

For each transaction:

fol r working papers, prepare a T accoun{ for each account listed.
the appropriate T accounts, analyze apd record each ofthe
3. Aft ing business transactions. Identify eaqh transaction by number.
recording all transactions, write the wgrd Balance on the normal
bal ce side of each T account. Then compyte and record the balance

for account.

May 1 1. Abe Shultz invested an additionbl $45,000 cash in his

5 business.

2. Bought grooming equipment on account from Dogs &

Cats Inc. for $8,500.

3. Purchased an office lamp for $8F, Check 150.
4. Abe Shultz transferred his persopal typelwiter, worth $200,

to the business.

5. Made a $3,000 payrnent on the grooming equipment

bought on account, Check 151.

6. Sold the typewdter on account lto Martha Giles for $200.
7. Bought a photocopier for $1,50P, Check 152.

8. Received a $L00 payment for t\e typewriter sold on

96 Chapter 4 Problems

Problem 4-6 An alyfi Transactions into IHAPTII{ 4

Juanita Ortega runs Outback Gu Service. The accounts she uses to reco Step-by-Step Instructions:
and report business transactions a Iisted below. Problem 4-6

General Ledger 205 Accounts Payable- l. Select the spreadsheet
101 Cash in Bank Peak Equipment Inc.
105 Accounts Receivable- template for Problem
MaryJohnson 2O7 Accornts Payable- 4-6.
130 Office Equipment 2. Enteryour name and
140 Computer Equipment Premier Processors the date in the spaces
145 Hiking Equipment 301 Juanita Ortega, Capital provided on the
150 Rafting Equipment template.
3. Complete the
Instructions For each transaction: spreadsheet using the
instructions in your
1. In your working pape6, prepa a T account for each account. working papers.
4. Print the spreadsheet
2. Analyze and record each of t following business transactions in t and proofyourwork.
5. Complete the Analyze
appropriate T accounts. Identi each transaction by number. activity.
6. Save your work and
exit the spreadsheet
ProSram.

3. After recording all transact compute and record the account

balance on the normal bala side of each T account.

4. Add the balances of those nts with normal debit balances.
5. Add the balances of those nts with normal credit balances.
6. Compare the two totals. Are t
the same?

Transactions

1. Juanita Ortega tra ferred an additional $53,250 from
her personal savin account into the business checking

account. ent for $550, Check367.
t on account from Peak
2. Bought hiking equi
3. Bought rafting equ

Equipment Inc. for 2,67 5.

4. Juanita Ortega tran her own computer, valued at

$850, to the busi

76 5. Bought a cash regi er for the office on account from

Premier Processors or $1,250.

79 6. Sold the computer n credit for $850 to MaryJohnson.

22 7. Paid $500 on a t to Peak Equipment Inc., Check 368

24 8. Purchased shelves r the office for $650, Check 369.

28 9. Paid $1,250 on t to Premier Processors, Check 370.

31 1O. Bought rafting oars for $175, Check 371.

Chapter 4 Problems 97

.[ HAPT,E [{ 4

Problem 4-7 Ana Transactions

in T Accounts

Richard ng owns and operates a job placement ice, Job Connect. The
T account below summarize several business sactions for May.

Use a form similar to the one ted below. For each of

the 10 tra

1. Ident fy the account debited, and record t account name in the

te column.

2. Indi e whether the account debited is bei increased or decreased.

3. Iden fy the account credited, and write the nt name in the

riate column.

4. Ind te whether the account credited is bei increased or decreased.

5. WIit a short description of the transaction.

(1) (2) (3) (4) (s)

Increase (I) Increase (I)
or Decrease (D) Decrease (D)

Richard Tang

invested

$15,000 in

the business.

Cash in Bank Accounts Receivable

Credit it Credit

(6)(4) 1-,22s 225 (e) 22s
e00
Office Furniture
(7) egs t Credit
900
(B) 2,000
145
Debi Credit
+
(s) 22s
(2)

puter Equipment Accounts Payable

rd Tang, Capital Credit
Credit +
+
(3) 8,000
(2)(1) 1s,0oo
22s (10) 14s

98 Chapter 4 Problems

Practice your test- king skills! The questions on this are reprinted with permission

from national nizations:
r Future Busi Leaders of America

o Business als of America

Use a separate of paper to record your answers.

/ Future Business of America

FBL\ Murrrptp Cnorcr

1. If a business pu hases a calculator on account, the ounts affected by this

transaction are

a. Cash in Ba k and Accounts Payable.

b. Office Equ ent and Accounts Receivable.

c. Office Equ ent and Cash in Bank.

d. Office Equ ent and Accounts Payable.

2. A skeleton f of an account showing only the debi and credit columns is

called a(n)

a. accountin equation.

b. T account.

c. accountba ance.

d. work shee

e. none ofth answers.

Business of America

AccouNr IorNrI

For each account me below, indicate its classification = Asset, L = Liability, OE =

Owner's Equity, = Revenuer E = Expense) by writing t correct capital letter(s) on

the blank. t, N = Neither).
I Balance
Then indicate its rmal balance side (DR = Debit,

Account Name Classification

3. Cash

4. Accounts Payab

5. Owner's Capita Account

Competitive Center. Click on Winning
. Practice and select Chapter 4.
. Concept and Test-Taking Tips
and Terminology

.--r-)!;- Chapter 4 W ning Competltive Events 99

IHApTrt{ 4

Double-Entry

L. Which side f an account is the debit side? Whic$ is the credit side?

2. How is the rm credit in Chapter 3 different ftom credit in Chapter 4?

3. For each of following transactions, state whetfier Cash in Bank is

debited, c ited, or not changed: (a) the businesg paid cash for a desk;

(b) the busi bought a computer on accounU (p) a customer paid an

outstandi invoice.

4. What is t relationship of a T account to a ledgep account?

5. Think of a siness you would like to open. Creaqe a chart of accounts for the

business. I e at least 10 different accounts.

L

6. Evaluate th usefulness of double-entry accountirpg.

cotusTgDY Service Landscaping

f While in rol Martin Hamilton gained expeiience working for a large

landscaping mpany. Martin plans to start a buslness called Landscapes and

Beyond. He made a list of everything he owns,lwith the estimated value for

each category $11,85000

Lawn 8,700 r
l
Shovels lawn-care tools 1,000 ]

Tiuck 400 l
700 i
Stereo equi t

50 books o landscaping

Desk, chai and file cabinet

Martin also rowed $5,000 from his family and wifl repay the debt in one year.

Write the accounting equation for Martin's new business, listing

each item in appropriate part of the equation.

Software

Imagine that you are a bookkeeper for an attorneylwho likes to use state-of-the-

art techn y. The business just received the latestrupdate on its Web site design

software. Y would like to use the software at ho1ne, so your assistant offers to

make you a rpy. Although you know that copyright laws protect software from

una use, you figure that one little copy cdn't hurt a multimillion dollar

software co rany; and besides, you are not doing the actual copying.

Ernrc.e,r Maxnvc

1,. What are he ethical issues? 4. How Ob tfre alternatives affect the

2. What are he alternatives? partiesl?

3. Who are affected parties? 5. What {vould you do?

Your su the Double-Entry System
Create a
the purc r asks you to teach some basic acco+nting to the other managers.
I presentation to explain the doublelentry accounting system. Use
of a computer to show how transactioprs affect different accounts.

100 Chapter 4 Real-World ions and Connections

ItlAPTEll 4

&.6rcu-s Brvoruo Teaching

TTIMBERS- Keeping up technology and learning new skills are important in today's

I -! workplace. arning from co-workers and supervigors is often the best way to

I-llI*IIt},|ATffi{ffi lncrease vour il1s.

ACCOUNTIflG 0N rnrJon

Assume that work as the accountant for Westside Aquatics, a swim club in

Florida. The lub has 250 members. While some ihdividuals pay cash on each

visit, others re billed monthly for club use. A concession area featuring health
foods and jui is a popular gathering place for mer[bers after swim lessons.

INsrn

List account mes that would be used in a busilness like this. Describe to a

classmate kinds of transactions might affect each account. What is the

normal balan side for each account?

Exchange

Businesses us$ exchange rates to convert from one cprency to another. Exchange

rates change lall the time and are found in newsiapers, at banks, and on the

Internet. Supfose that you want to convert U.S. dollars to Canadian dollars, and

$1.00 (U.S.) islcurrently worth $1.25182 (Canadian) j You would multiply the U.S.

dollars by thelexchange rate as follows: Canadian dollars
$6.26
U.p. dollars x exchange rate

$5.00 x 7.25182

Iusr Using this exchange rate, analyze which company has the higher

value of total ssets:

Company A $150,000 (u.s.)

Company B $176,000 (Canadian)

Your SpendinglPlan

Cash is an asspt. If you spend it, the asset decreases. .{ good way to safeguard your
cash is to creafe a spending and savings plan, and th6n follow it.

Pnnsouar Fnri,uvcr Acrrlrry Suppose you want to save $20.00 per month. You

have kept trapk of your personal finances for sevefal months and you see the
following pat{ern:

Money comiltX in each month: allowance, $20.00; phrt-time job, $ 112.00
Money goin$ out each month; lunches, $25.00; srlacks, $8.50; bus fare, $8.00;

CDs, $28.0p; contributions to charity, $10.00; movie theatres, $22.00; pizza,

click on t Center. Click on Making It Person[l and select Chapter 4.

--a/ a\- Chapter 4 Real-World Applicfl tions and Connections 101
': ':)

ItlAPTIt{ 5 Tra sactions That Affect

Re enu€, Expenses,
an Withdrawals

What You'll Learn Predict

Explain the difference l. What does the chapter title tellyou?
between permanent accounts
and temporary accounts. 2. What do you already know about this subject from personal experience?
5. What have you learned about this in the earlier chapters?
List and apply the rules of 4. What gaps exist in your knowledge of this subject?
debit and credit for revenue,
expense, and withdrawals Southwest Airlines
accounts.
While other large airlines lost mloney after the 9/ 1 1 disaster,
Use the six-step method to Southwest Airlines was flying trigL. fhe airline has posted
analyze transactions affectin g more than 30 years of consecutivelprofits and become a model
revenue, expense, and for newer airlines to follow.
withdrawals accounts.
Southwest carries more than 65 million passengers every
Test a series of transactions
for equality of debits and year. Each one-way fare averaged gver $BB per passenger.
credits. Like any business, Southwest r4ust consider expenses.

Define the accounting terms Operating expenses include the cost of more than 1 billion
introduced in this chapter. gallons of jet fueI and payroll expenses for more than 32,000
employees. Don't forget the cost df snacks. Southwest serves
Why lfs lmportant 85 million bags of peanuts each ydar.

Temporary accounts show What Do You Think?
the changes in owner's equity
during each accounting Aside from passenger fares, frdm what other sources do you
period. think Southwest Airlines generates revenues?

5Chapter Transactions -I-hat t Revenue, Expenses, and Withdrawals

When you receive a paycheck, you probably
think about the amount of money you have and
the things you would like to buy. Businesses like
Southwest Airlines also earn money and spend
it on items used to operate the business. ln this
chapter you will learn to analyze transactions
involving the revenue and expenses of a business.

Personal Connection

t. How does your workplace (or the workplace

of family or friends) earn revenue?

2. What does the business buy with that revenue?
5. How do these revenue and expense

transactions affect the profits of a business?

Online Connection

Go to glencoeaccounting.glencoe.com and click
on Student Center. Click on Working in the
Real World and select Chapter s.

t-'>==,

sEITtI},| I el iltionship of Rbvenue,

Main ldea Ex enses, and Withdrawals

Revenues, expenses, and to )wner's Equity
withdrawals are temporary
accounts. They start each n Chapter 4 you learned to record trpnsactions in asset, liabiliry
new accounting period with and owner's capital accounts. In this chapter you will learn to record
zero balances. tra actions in revenue, expense, and oqner's withdrawals accounts.

Read to Learn... l accounts provide information aboui how the business is doing. A
for Southwest Airlines would never tlke off in a 737 equipped with
> howtemporaryaccount a speedometer and a gas gauge. Thele two instruments, although
;sary, do not give a pilot all of the information needed to keep
transactions change a complex aircraft on course and opdlating smoothly. Operating a
owner's equity. (p. 104) ness is a bit like operating a737. Owndrs need revenue and expense
rmation to keep the business on course.
> the rules of debit and
fi mPorary and Permahent Accounts
credit for temporary
accounts. (p. 105) Fiyy:-"#Ty:,:::yuunrTnporaryAccounts

Key Terms ,tments. For example, the revenue, o[ income, earned by the busi-
increases owner's equity. Both expefises and owner's withdrawals
temporary accounts rease owner's equity. (Remember thJt revenue is not the same as
permanent accounts
r's investment, and expense is not the same as an owner's

.)

Revenue, expenses, and withdrawals bould be recorded as increases

directly in the capital account. This method, however, makes
ing information about these transacti0ns difficult. A more informa-
tive w y to record transactions affecting revqnue and expenses is to set up
separa accounts for each type of revenue pr expense. Such information
helps he owner decide, for example, whet$er some expenses need to be

red

As u learned in Chapter 2, t}:re life of l business is divided into peri-

ods of ime called accounting periods. The aqtivities for a given accounting
peri are summarized and then the period]is closed. A new period starts,
and nsactions for the new period are enterpd into the accounting system.
The tcess continues as long as the businels exists.

U ing Terrporary Accounts. {"r".rr", expense, and with-

draw i accounts are used to collect inforn]ration for a single accounting
peri . These accounts are called tempLrary accounts . Temporary

to4 Chapter 5 Transactions That Revenue, Expenses, and Withdrawalq

Accumulated tele Utilities Expense
for accounting period
$2,857
Accumulated electricity 5,141
for accounting period
$7,998
Total for accounting pe

Utilities Expense balance transferred $90,000
o Owner's Capital at end of accounting $82,002

riod. Expenses decrease owner's capital.

Owner's Capital

Balance at Beginning of

Accounting Period

Balance at End of

Accounting Period

Figure 5-1 The Relationship of Temporary to the 0wner's CapitalAccounl

accounts start each new accounting riod with zero balances. That is, the

amounts in these accounts are not arried forward from one accounting

period to the next. Temporary accou ts are not temporary in the sense that

they are used for a short time and th discarded. They continue to be used

in the accounting system, but the a unts recorded in them accumulate

for only one accounting period. At t end of that period, the balances in

the temporary accounts are tran to the owner's capital account. (The

procedure for transferring these bala to owner's capital is explained in

Chapter 10.)

Let's use Utilities Expense, a t porary account, as an example. Dur- ,J

ing an accounting period, business t ansactions related to utilities such as t*,

electdcity and telephones are record in Utilities Expense. By using this ,, lf I
i!, li'i/fti i/t!: :,/
separate account, the owner can see t a glance how much money is being
'
spent on this expense. The individu I transaction amounts accumulate in
i /rr
the account as the accounting peri progresses.
#:'{j
At the end of the period, the spent is transferred to the owner's

capital account and subtracted from the capital account balance. Remem-

ber, expenses decrease owner's capita . In Figure 5-1, the account, Utilities

Expense, starts the next accounting od with a zeto balance-ready for

the transactions in the new period.

Usirrg Perrnanent Accou ts. In contrast to the temporary

accounts, the owner's capital accou t is a permanent account. Asset and

liability accounts are also permanen accounts. Permanent accounts are

continuous from one accounting peri to the next. In permanent accounts

Section 1 tionship of Revenue, Expenses, and Withdrawals to Owner's Equity 105

the dolla balances at the end of one accountir{g period become the dollar

balances rr the beginning of the next accountlng period.

Permanent Account For ple, if a business has furniture tqtaling $2,875 at the end of
one
the beg nting period, the business will start with $2,875 in furniture at
ing of the next accounting period. 'lthe ending balances in per-

-+Normal Balances manent ounts are carried forward to the next accounting period as the
Assets debit
beginni balances.
-+Liabilities
credit

+Ownert credit Accounting Period Beginning of Next Accounting Period
Furniture Furniture
Capital

Credit Dgbit

s-e-g-.--saT[.-z-,-s-z-s

The nent accounts show balances op hand or amounts owed at
anv t They also show the day-to-day charpges in assets, liabilities, and
owner's
tal.

The les of Debit and Cledit

for Porary Accounts

What re the Nonnal Balantces of Reyenue, Expertse,
and Accaunts?

In hapter 4 you learned the rules of

debit a credit for the asset, liability, and Owner's Capital Account

Temporary The term owner's capital accounts. In this chapter Debit Credit
temporory might make we will tinue with the rules of debit
you think of something a
that lasts for a limited and it, this time for revenue, expense, Dectease
time. Atemporory l Side Increase
account, however, and wit rawals accounts. Before looking Side
always stays in the
ledger. lts balance is att rules, let's review quickly the T Normal
reduced to zero at the Balance
end of each accounting
period. accoun showing the rules of debit and

credit r the owner's capital account.

As will see, the rules of debit and crddit for accounts classified as

reven , expense, and withdrawals accounts 5re related to the rules for the

owne capital account.

for Revenue Accounts

Ac ounts set up to record business income are classified as reve-
nue ac untS. The following rules of debit and credit apply to revenue

Ru A revenue account is increased (+) on the credit side.
Ru A revenue account is decreased (-r) on the debit side.
Ru The normal balance for a revenue account is the increase side,

or the credit side. Revenue accounts normally have credit

balances.

nue earned from selling goods or services increases owner's capital.

The re tionship of revenue accounts to the owner's capital account is shown

byt T accounts in Figure 5-2. Can you dxplain why the T account for

reven is used to represent the credit (tight) side of the capital account?

106 Chapter 5 Transactions That t Revenue, Expenses, and Withdrawals

Permanen Account
Owner's Capital

Debit credit Gh^
+ "on-
Decrease Side Increase Side Temporary Account
Normal Balance ;? NormalBalances

W. Revenue --+ credit

Revenue Expense ---> debit
Owner's ---> debit
Debit Credit
+ Withdrawals
Decrease Side
Increase Side
Normal Balance

Figure 5-2 Rules of Debit and Credit for A credit balance is recorded
on the credit side.

Accounts

Increases in owner's capital are sh n on the credit side of that account.
Revenue increases owner's capital, so he revenue account is used to repre-

sent the credit side of the owner's ca tal account.

We can summarize the rules of bit and credit for revenue accounts
with a T account illustration.

Revenue

Debit Credit
+
(2) Decrease
Side (1) Increase

Side
(3) Normal

Balance

Let's apply the rules of debit and credit to an actual revenue account.

Look at the entries in the T account the revenue account called Fees. The

increases to the revenue account are on the right, or credit, side of

the T account. The decreases are reco Debit Fees
on the left, or debit, side. To find the 200
Credit
ance, subtract total debits ($2oo) fr +
total credits ($500 + $1,000 + $2, s00
$3,500). You get a balance of $3,300 on 1,000
the credit side, the normal balance le
2,OOO
for a revenue account.
Bal. 3,300

Rules for Expense f operating a business are expense Temporary and
Permanent Explain how
Accounts that record the costs apply to expense accounts: the terms temporory
and permonenf apply to
accounts. These debit and credit r ledger accounts.

RuIe 1: An expense account is on the debit side.

Rule 2: An expense account is on the credit side.

Rule 3: The normal ballnce for an se account is the increase side, or

th.e debit side. Expense ounts normally have debit balances.

1Section Rela ionship of Revenue, Expenses, and Withd wals to C)wner's Equity 7O7

tal. are the costs of doing business. Expenses decrease owner's capi-
Look at have the opposite impact; revenues increase owner's capital.
expense e T accounts in Figure 5-3. Can you explain why the T account for
is used to represent the debit (left) side of the capital account?

Permanent Account
Owner's Capital

."".} Debit Credit 4ro^

,{ !'c" Decrease Side + "h",,

a% Increase Side q*{t
Norm4l Balance
Y,. .

Expenses Revenue

t Credit Debit Credit
Decrease Side +
Side Decrease Side
ance Increase Side
Normal Balance

Figure 5-3 Rules of debit balance is recorded A credit balance is recorded
on the debit side. on the credit side.
Debit and Credit for Expense
Accounts

De reases in owner's capital are shown on the debit side of that account.
Since e penses decrease owner's capital, expense accounts are used to repre-
sent th debit side of the owner's capital account.

Let s use a T account to summarize the rules of debit and credit for

expens accounts.

Expense Accounts

Debit Credit
+
(2) Decrease
(1) Increase Side

Side

(3) Normal

Balance

look at the entries recorded in the T account called Advertising

Expe ;e. The increases to the expense account are recorded on the left, or

debit, ide of the T account. The decreases

to the nt are recorded on the right, Advertising Expense

OT CI it, side of the T account. When Debit Credit
+ 125
total its ($125) are subtracted from
400
total its ($600), there is a balance of
200
$47s the debit side, which is the nor- Bal.475

mal lance side for expense accounts.

R for the Withdrawals Aqcount

the ithdrawal is an amount of money or an asset the owner takes out of
equit iness. The withdrawals account is classified as a temporary owner's
account. Recall that the permanent owner's equity account is the
rules capital account. Withdrawals, like expenses/ decrease capital, so the
debit and credit are the same as for expense accounts.

108 Chapter 5 Transactions That t Revenue, Expenses, and Withdrawalp

Withdrawals Account le 1: The withdrawals account is

Debit Credit increased on the debit side.
+
(2) Decease The withdrawals account is
(1) Increase Side
decreased on the credit side.
Side Thenormalbalance for the with- Capital and
drawals account is the increase Withdrawals Consider
(3) Normal side or debitside. The withdraw- the owner's capital
Balance account and the ownert
withdrawals account.
W. Smith, Withdrawals als account normally has a debit How are they similar?
balance. How are they different?

Debit view the entries in the T account W.
+ Sm th, Withdrawals. The increases are

s00 rded on the left, or debit side, of the
1,500 T nt. The decreases are recorded on
Bal. 1,800

the t, or credit, side of the T account.

When total credits ($200) are subtrac from total debits ($2,000), there is
a balance of $1,800 on the debit side which is the normal balance side for

the withdrawals account.

Summary of the Rules Debit and Credit
for Temporary Accounts

Figure 5-4 summarizes the rules debit and credit for the temporary
accounts and the basic accounting lationships of these accounts to the

owner's capital account.

Perma Account
Capital

..."" Debit Credit

^%+

Increase Side

"%"Normal Balance
*t1.:: Decrease Side '\;:?,

""rK Revenue
Expenses

Debit Credit Debit Credit
+ Decrease Side Decrease Side +

Increase Side Increase Side
Normal Balance Normal Balance

Withdrawals

De-bit Credit
+ Decrease Side

Increase Side
Normal Balance

A debit balance is recorded A credit balance is recorded
on the debit side. on the credit side.

Figure 5-4 Rules of Debit and Credit for ary Accounts

1Section Rel tionship of Revenue, Expenses, and Wit ls to Owner's Equity 1O9

$tITr0N r

Reinforce the Main ldea

Create a chart like this one to
illustrate the different types
of accounts. Fill in each blank
box with one or more of
the following terms: osse8,
li o b iIiti es, own e r's cap ito l,
revenue, expenses, owner's
withdrawols.

Do the Math activity during the accounting pgriod:

A company had the fol es: $5,000
500
Made sales:
Incurred advertising 3,000
Incurred salaries e
Deposited a check from owner's personal savings account: l,2OO
Additionally, the
business had paid $65O removed a computer from the business for personal use. The

the computer. What was the total effect on owner's equity?

Problem 5-I the Rules of Debit and Credit

Caroline Palmer uses t following accounts in her San Francisco-Los Angeles commuter

shuttle service. l

General Ledger Caroline Palmer, Capit0l
Cash in Bank Accounts Receivable
Advertising
Caroline Palmer, thdrawals Food Expense
Airplanes
Fuel and Oil Ex Flying Fees
Repairs Expense Accounts Payable

lnstructions In the provided in your working papers, provide the following informa-
tion for each account, first account is completed as an example.

1. Classify the account an asset, liability, owner's equity, rerfenue, or expense account.
2. Indicate whether th increase side is a debit or a credit.
3. Indicate whether decrease side is a debit or a credit.
4. Indicate whether th account has a normal debit balance or a normal credit balance.

110 Chapter 5 Transactions That t Revenue, Expenses, and Withdrawald

$tIIrn]r z Ap plying the Rul
of Debit and Cre

Re enu€, Expens
hdrawals Tra sactions

In Section 1 you learned the rul of debit and credit for rev-

enue, expense, and withdrawals s. Learning to apply these

rules to typical business transacflons i our next task. In the course

of a week, a business might receive ey, pay rent, or pay util- ldea

ity bills. Let's look at more transact for Roadrunner Delivery try accounting requires
total debits and total credits are
Service.
equal.
Analyzing Transacti
how to analyze revenue, expense,
Haw Do You Analyze and owner's withdrawals
Tetnporary Accounts?
lll)transactions. (p.
In Chapter 4 Roadrunner's tta ns dealt with asset and
how to confirm that total debits
liability accounts and with the perm t owner's equity account, and total credits are equal in the

Maria Sanchez, Capital. Using the les of debit and credit, let's ledger. (p.lls)

analyze several business transactions affect revenue, expense, Term

and owner's withdrawals accounts. U the same six-step method recognition

you learned in Chapter 4. Refer to runner's chart of accounts

on page 79 to analyze the following

On October 75 Roadrunner delivery services for Sims Corporation. checkfor $7,200was
received in full payrnent.
accounts Cash in Bank and Delivery
ANALyS15 tdentify
in Bank is an asset account. Revenue is a revenue
Classify
in Bank is increased by $l,2OO. Revenue is increased by
+/-

DEBIT-CREDIT RULE in asset accounts are recorded debits. Debit cash in Bank

in revenue accounts are as credits. Credit Delivery
for $l,2OO.

Section 2 Applying the Rules of and Credit to Revenue, Expense, and hdrawalsTransactions 111

T ACCOTJNTS 6. Cash in Bank Delivery Revenue
D"Pit

On October 16 Roadrunner mailed 103 for $700 to pay the month's reht.

ANALYSIS tdentify accounts Rent Expense and Cash in Bink are affected.
Expense is an eipense account. Cash in Bank is an asset account.
Clossily Expense is increased by $700. Cash irl Bank is decreased by $700.

+/-

DEBIT-CREDIT RULE 4. in expense accounts are recorde( as debits. Debit Rent

5. lse ftourt $)/7uOu0..

ases in asset accounts are recorded as credits. Credit Cash in

for $700.

Cash in Bank

On October 18 Beacon Advertising an advertisement for Roadrunne!. Roadrunner will pay
Beacon's $75 fee later.

ANALYSIS tdentify t. acco u nts Advertising Expense a nd AJcou nts Payabte-Beacon

Clossify are affected.

+/- 2. Expense is an expense account. Accounts Payable-

Advertising is a liability account.

5. ;ing Expense is increase d by $7 5- Payable-Beacon

fccounts

DEBIT.CREDIT RULE 4. in expense accounts are recorded as debits. Debit Advertising
5.
in liability accounts are recorde( as credits. Credit Accounts
Beacon Advertising tor $75.

112 Chapter 5 Transactions That Revenue, Expenses, and Withdrawals

T ACCOI,]NTS 6. Advertising Expense Accounts Payable-
Beacon Advertising
Debit I Credit
it I Credit
-t+

On October 20 Roadrunner billed ty News $L,450 for delivery services.

accou nts Accounts Receivable-City and Delivery Revenue
affected. account. Delivery

Receivable-City News is an by $1,450. Delivery
is a revenue account.
Receivable-City News is
is increased by $1,450.

DEBIT-CREDIT RULE 4, in asset accounts are recorded debits. Debit Accounts
News for $1,450. as credits. Credit Delivery
5.
in revenue accounts are

for $1,450.

counts Receivable-City News Deliverv Revenue

Debit I Credit it I Credit

ln Transaction 11 Roadrunner orded revenue for services provided,
even though the money had not bee collected. Following the GAAP prin-

ciple of revenue recognition, reven is recorded on the date earned, even
if cash has not been received.

On October 28 Roadrunner paid a 125 telephone bill with Check 104.

ANALYSIS tdentilY I. accounts Utilities Expense and Cash Bank are affected.
ClossifY ties Expense is an expense account. in Bank is an asset
2-
unt. in Bank is decreased
+/- 5. Expense is increased by $125.

DEBIT-CREDIT RULE 4. IN in expense accounts are as debits. Debit utilities
credits. Credit Cash in
for $125.
in asset accounts are recorded

Section 2 Applying the Rules of and Credit to Revenue, Expense, and hdrawalsTransactions 113