Accounting Equation and Transactions
What is the accounting equation?
Assets=Liabilities+Owners Equity
The collection of all accounts used by a business.
ledger
Revenue, expense, and withdrawals accounts that are closed at period end.
temporary account
What is shown on the left side of a T-account?
debits
On Jan 1, owner invests $10,000 cash. Show entry & effect.
Debit Cash $10,000; Credit Capital $10,000. Assets +, Equity +.
If a business obtains a $5,000 investment from Ray, how are the accounts affected?
5,000 debit cash, 5,000 credit Ray capital
What is the purpose of the chart of accounts?
It lists all accounts and their numbers for reference.
How do expenses affect equity?
They decrease Owner’s Equity.
Cash increases by $400. Which side of the T-account is used?
debit side
Buy $400 supplies with cash. Show entry.
Debit Supplies $400; Credit Cash $400. Assets change type, total unchanged.
Equipment worth $4,000 purchased on account — effect?
Assets (Equipment) +$4,000; Liabilities (Accounts Payable) +$4,000
Every transaction affects at least two accounts, with debits = credits, this is known as ________ entry accounting
double
Rule for recording revenue?
Increase with a credit; decrease with a debit.
Record in T-accounts: Business earns $1,200 on account.
Debit Accounts Receivable $1,200; Credit Revenue $1,200.
Perform services on account for $2,000. Later collect $800 cash. Show both entries.
Services: Debit A/R $2,000; Credit Revenue $2,000
Collection: Debit Cash $800; Credit A/R $800
Supplies of $600 are purchased on account. What is the effect?
Assets (Supplies +$600); Liabilities (Accounts Payable +$600).
Normal balance side for assets?
Debit
The owner withdraws $700 cash. Show entry.
Debit Withdrawals $700; Credit Cash $700.
Record in T-accounts: Paid $500 to creditor for Accounts Payable.
Debit Accounts Payable $500; Credit Cash $500.
Pay $1,000 salaries expense in cash. Show effect.
Debit Salaries Expense $1,000; Credit Cash $1,000. Assets –; Equity –.
If the business pays $300 cash to a creditor (Accounts Payable), what is the effect?
Assets (Cash –$300); Liabilities (A/P –$300)
Record: Business receives $500 cash for providing services.
Debit Cash $500; Credit Revenue $500.
Record: Business pays $900 rent expense in cash.
Debit Rent Expense $900; Credit Cash $900. Assets decrease, Equity decreases.
A utilities bill of $250 is received but not paid. Record in T-accounts.
Debit Utilities Expense $250; Credit Accounts Payable $250.
Beginning: Cash $3,000; Supplies $500; Accounts Payable $400; Capital $3,100. Transactions:
Earn $1,500 revenue in cash
Purchase $200 supplies on account
Pay $300 cash for utilities expense
Owner withdraws $400
Revenue: Debit Cash +$1,500; Credit Revenue +$1,500
Supplies purchase: Debit Supplies +$200; Credit A/P +$200
Utilities: Debit Utilities Expense +$300; Credit Cash –$300
Withdrawals: Debit Withdrawals +$400; Credit Cash –$400