Relationship between the Accounting Equation and a T Account
What is the accounting equation?
Assets = Liabilities + Owner's Equity
What is the debit side of an account?
The left side.
What is the first rule of account increases?
Debits increase asset and expense accounts.
What is the first question to ask when analyzing a transaction?
What two accounts are affected?
What happens when cash is received from sales?
When cash is received from sales, it increases both cash (an asset) and sales revenue (increasing owner's equity).
How does a T account represent the accounting equation?
By showing debits on the left and credits on the right.
What is the credit side of an account?
The right side.
What is the second rule of account increases?
Credits increase liability, equity, and revenue accounts.
What is the second question when analyzing a transaction?
How are these accounts affected (increased or decreased)?
What effect does selling services on account have?
Selling services on account increases accounts receivable (an asset) and service revenue (increasing owner's equity).
Explain the relationship between assets, liabilities, and equity.
Assets are owned, liabilities are owed, and owner's equity is the residual interest in the assets after liabilities.
How do debits and credits affect accounts?
Debits increase assets and expenses while decreasing liabilities and equity; credits do the opposite.
How can you apply the rules of increases to a specific account?
By identifying whether a transaction involves an asset, liability, or equity account
What is the third question when analyzing a transaction?
What is the monetary amount involved in the transaction?
What occurs when cash is paid for an expense?
Paying cash for an expense decreases cash (an asset) and increases expenses (decreasing owner's equity).
How does increasing an asset affect the accounting equation?
Increasing an asset increases the total of the accounting equation, affecting either liabilities or owner's equity.
What is the increase side of an asset account?
The debit side.
Restate the rules of increases in your own words.
Debits and credits affect different types of accounts in specific ways.
What is the fourth question to analyze a transaction?
What is the source of the transaction?
What does it mean when cash is received on account?
When cash is received on account, it increases cash (an asset) and decreases accounts receivable (also an asset).
What is the impact of a liability increase on owner's equity?
An increase in liabilities decreases the owner's equity, representing an obligation that must be settled.
What is the decrease side of a liability account?
The debit side.
How do the rules of increases apply to owner’s equity?
By indicating how transactions affect the owner's investment in the business.
How can these questions help you start a business?
These questions help start a business by ensuring that all aspects of a transaction are considered for accurate accounting.
What happens when cash is paid to the owner for personal use?
Paying cash to the owner for personal use decreases cash (an asset) and decreases owner’s equity.