BUSA
100 – Introduction to Accounting
Chapter
3: Analyzing Business Transactions
Using T-accounts
(Debits & Credits, Trial
Balance, and Financial Statements
Schmidt
Purpose: The purpose of this handout is to summarize some key concepts
that will be used repeatedly throughout this course.
This
chapter in perspective:
This chapter will really be an expansion of
what we have done so far. Recall
that we have analyzed transactions.
We
determined what accounts were being utilized, decided whether we wanted to
increase or decrease the account.
We
recorded the transaction under the proper caption. Furthermore, we insured that the equation was in balance
after we recorded the transaction.
Recording transactions under columnar headings is very messy and
inefficient. In this chapter,
we will learn about tools used to record business transactions.
This chapter will serve as a stepping-stone to the next chapter.
T-Accounts
T-Accounts will replace the columnar headings
we have been using so far. A
T-Account looks like a big T. Each
account will have its own T. Depending
on the type of account that we will use, increases and decreases will be
recorded on the appropriate debit or credit side.
·
A debit just means
the left side.
·
A credit just means
the right side.
·
You summarize a
T-Account by adding up both sides and placing the balance of the account
(the difference between the two sides) on the side with the larger total.
This is called “footing” an account.
·
We will utilize
T-Accounts to help us understand the five basic rules of accounting.
*
One thing to keep in mind: Debits equal credits--ALWAYS!!!
· Normal Balance – The side of the account that receives the increase.
All accounts should have normal balances.
See rules for debits and credits on separate
handout
Trial
Balance
·
Prepared after
transactions have been recorded.
·
All accounts should
have normal balances.
·
Purpose is to prove
equality of debits and credits.
·
If the Trial
Balance totals are not equal, the financial statements will not balance.
·
If the Trial
Balance totals do not equal, try the following:
Look for balances that are not normal.
Check the transfer of totals from T-Accounts to the Trial Balance.
Re-add the columns.
Re-compute the account totals.
Look for the total difference, half the difference, or double the
difference.
If the difference is divisible by 9, then you most likely have a
transposition error or a slide error.
Financial
Statements
·
The result of the
“summarizing” process of accounting.
·
All financial
statements are inter-connected; therefore, the order of preparation is
important.
· Headings are important:
Each financial statement has a three-part heading
Name of the Company
Name of the Statement
Time period covered – or date
Dollar
signs, total lines, and double-ruled lines are important.
These
go out to external users. The appearance is important.
· Three financial statements that we will learn and expand upon during the semester:
Income Statement
Statement of Owner’s Equity
Balance Sheet
(See previous chapter notes. Again, STUDY THESE as we will use them in every chapter from here on out.)
Chart of Accounts
A chart of accounts
is a list of all the accounts that a business uses. Accounts are
assigned numbers based on the type of account. No matter how many
digits are included in an account number, all companies keep a uniform
numbering system where all assets begin with a 1, all liabilities begin with
a 2, all equity accounts begin with a 3, all revenue accounts begin with a 4
and all expense accounts begin with a 5. An example of a typical numbering
system can be found on page 75 of your texts.
Permanent and Temporary Accounts
All accounts are either considered permanent or temporary....one or the
other. Accounts that have balances that are carried forward from one
period to the next are called permanent or real accounts. These would
include asset, liability, and owner's equity accounts (except for drawing.)
In other words, all BALANCE SHEET accounts are considered real or permanent.
Temporary accounts, on the other hand, are temporary which means they must start over at the beginning of the next period. These are also known as nominal accounts. Revenue and expense accounts, along with the drawing account, are considered nominal or temporary. We will discuss how closing entries work -- and how the process of closing the nominal accounts out to zero-- in the next chapter.