the difference between the amounts recorded on the two sides of an account
Define:
accounts
written records of the assets, liabilities, and owner's equity of a business
Define:
chart of accounts
a list of the accounts used by a business to record its financial transactions
Define:
classification
a means of identifying each account as an asset, liability, or owner's equity
Define:
credit
an entry on the right side of an account
Define:
debit
an entry on the left side of an account
Define:
double-entry system
an accounting system that involves recording the effects of each transaction as debits and credits
Define:
drawing account
a special type of owner's equity account set up to record the owner's withdrawal of cash from the business
Define:
footing
a small pencil figure written at the base of an amount column showing the sum of the entries in the column
Define:
normal balance
the increase side of an account
Define:
permanent account
an account that is kept open from one accounting period to the next
Define:
slide
an accounting error involving a misplaced decimal point
Define:
T account
a type of account, resembling a T, used to analyze the effects of a business transaction
Define:
temporary account
an account whose balance is transferred to another account at the end of an accounting period
Define:
transposition
an accounting error involving misplaced digits in a number
Define:
trial balance
a statement to test the accuracy of total debits and credits after transactions have been recorded
Why do owners and staff use accounts?
to help analyze, record, classify, summarize, and report financial information
Describe the set up (increases and decreases) of T accounts for assets, liabilities, and owner's equity.
T or F:
Asset increases appear on the left side of the T account.
True
T or F:
Liability decreases appear on the right side of the T account
False; Liability decreases appear on the left side of the T account
T or F:
Owner's Equity increases appear on the right side of the T account.
True
What steps are used to analyze the effects of the business transactions?
1. Analyze the financial event.
- Identify the accounts affected.
- Classify the accounts affected.
- Determine the amount of increase or decrease for each account.
2. Apply the left-right rules for each account affected.
3. Make the entry in T-account form.
Carolyn Wells withdrew $100,000 from personal savings and deposited it in the new business checking account for Wells’ Consulting Services.
What effect does this have on the T account?
ANALYSIS
a. The asset account, Cash, is increased by $100,000.
a. The owner’s equity account, Carolyn Wells, Capital, is increased by $100,000.
LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the left side of the T account. Record $100,000 on the left side of the Cash T account.
RIGHT Increases to owner’s equity accounts are recorded on the right side of the T account. Record $100,000 on the right side of the Carolyn Wells, Capital T account.
Wells’ Consulting Services issued a $5,000 check to purchase a computer and other equipment.
What effect does this have on the T account?
ANALYSIS
b. The asset account, Equipment, is increased by $5,000.
b. The asset account, Cash, is decreased by $5,000.
LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the left side of the T account. Record $5,000 on the left side of the Equipment T account.
RIGHT Decreases to asset accounts are recorded on the right side of the T account. Record $5,000 on the right side of the Cash T account.
The firm bought office equipment for $6,000 on account from Office Plus.
What effect does this have on the T account?
ANALYSIS
c. The asset account, Equipment, is increased by $6,000.
c. The liability account, Accounts Payable, is increased by $6,000.
LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the left side of the T account. Record $6,000 on the left side of the Equipment T account.
RIGHT Increases to liability accounts are recorded on the right side of the T account. Record $6,000 on the right side of the Accounts Payable T account.
Wells’ Consulting Services issued a check for $1,500 to Office Delux Inc. to purchase office supplies.
What effect does this have on the T account?
ANALYSIS
d. The asset account, Supplies, is increased by $1,500.
d. The asset account, Cash, is decreased by $1,500.
LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the left side of the T account. Record $1,500 on the left side of the Supplies T account.
RIGHT Decreases to asset accounts are recorded on the right side of the T account. Record $1,500 on the right side of the Cash T account.
Wells’ Consulting Services issued a check in the amount of $2,500 to Office Plus.
What effect does this have on the T account?
ANALYSIS
e. The asset account, Cash, is decreased by $2,500.
e. The liability account, Accounts Payable, is decreased by $2,500.
LEFT-RIGHT RULES
LEFT Decreases to liability accounts are recorded on the left side of the T account. Record $2,500 on the left side of the Accounts Payable T account.
RIGHT Decreases to asset accounts are recorded on the right side of the T account. Record $2,500 on the right side of the Cash T account.
Wells’ Consulting Services issued a check for $8,000 to pay rent for the months of December and January.
What effect does this have on the T account?
ANALYSIS
f. The asset account, Prepaid Rent, is increased by $8,000.
f. The asset account, Cash, is decreased by $8,000.
LEFT-RIGHT RULES
LEFT Increases to asset accounts are recorded on the left side of the T account. Record $8,000 on the left side of the Prepaid Rent T account.
RIGHT Decreases to asset accounts are recorded on the right side of the T account. Record $8,000 on the right side of the Cash T account.
Which side of the T account do you record the Balance?
whichever side has a larger total
If the total on the right side is larger than the total on the left side, the balance is recorded on the right side
If the total on the left side is larger, the balance is recorded on the left side.
Example of T-Account Balances
Prepare a Balance Sheet based on the information below: p
Increases are recorded on which side of asset, liability, and owner's equity accounts?
Increases in asset accounts are recorded on the left side.
Increases in liability and owner's equity accounts are recorded on the right side.
What is a footing?
The sum of several entries on either side of an account that is entered in small pencil figures.
What is meant by the “normal balance” of an account? What is the normal balance side for asset, liability, and owner's equity accounts?
The increase side of an account.
The normal balance of an asset account is on the left side.
The normal balance of liability and owner's equity accounts is on the right side.
Foot and find the balance of the Cash account.
B. 26,150
The Wilson Company purchased new computers for $10,800 from Office Supplies, Inc., to be paid in 30 days. Which of the following is correct?
B. Equipment is increased by $10,800. Accounts Payable is increased by $10,800.
From the following accounts, show that the fundamental accounting equation is in balance. All accounts have normal balances.
Cash—$15,400
Accounts Payable—$10,000
David Jenkins, Capital—$30,000
Equipment—$20,000
Supplies—$4,600
