2

11

The Account...
An individual accounting record
of increases and decreases in a
specific Asset, Liability, or
Stockholders Equity item.

The Account
Three parts :
1) the Title of the
account
2) a left or Debit side
3) a right or Credit side
2

3
11

Debits and Credits

Debit means left
thus, entry on left side is debiting
Credit means right
thus, entry on right side is
crediting
Normal balance is the side the
increase happens on.
3

Examples

Total the Entries to Each Side

TITLE
Debit

Credit

Total Debits Total Credits

If the greater sum is on the left,

the account has a Debit Balance
5

Total the Entries to Each Side

TITLE
Debit

Credit

Total Debits Total Credits

If the greater sum is on the right,

the account has a Credit Balance
6

Whichever side you

increase is the
normal balance!
7

Normal Balances
Assets

Liabilities
+ Stockholders Equity
Assets are on the left side
of the accounting equation.
The left side of the T-account
is the debit side,
so the normal balance for
an asset is a debit balance

Normal Balances
Assets

Liabilities
+ Stockholders Equity

Liabilities are on the

right side of the accounting
equation.
The right side of the
T-account is the credit side,
so the normal balance
for a liability is a credit
balance.
9

Normal Balances
Assets

Liabilities
+ Stockholders Equity

Stockholders equity is
on the right side
of the accounting equation.
The right side of the
T-account is the credit side,
so the normal balance
for a stockholder equity
account is a credit balance
10

Normal Balances
Assets

Liabilities
+ Stockholders Equity

Stockholders equity (SE)

is on the right side
of the accounting equation
and carries a credit balance.
Dividends paid to stockholders reduces their equity
In the business,
So dividends decrease SE
and carry a debit balance.
11

Normal Balances
= Liabilities + Stockholders Equity

Retained Earnings (RE) is on the right side of the

accounting equation and carries a credit balance.
Revenues increase RE, so have a credit balance.
Expenses decrease RE, so have a debit balance.

12

Expansion of Basic
Equation

13

My Process
Accounts affected?
Type of Account?
Normal balance?
Increase or Decrease?
Debit or credit?

14

Lets Practice!
Lets practice transaction
analysis with Sierra
Corporation. . .

15

Event 1 Investment of
Cash
by
Stockholders
Oct. 1 - Owner invested $10,000
Cash in business in exchange for
$10,000 of Sierra Corporation
Common
Stock
Accounts
affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?

16

Event 1 Investment of Cash

Oct.
1 - Owner invested $10,000
by Stockholders
Cash in business in exchange for
$10,000 of Sierra Corporation
Common
Stock
Accounts
affected?
Cash
Common Stock
Type of Account? A
Normal balance
Dr
Increase or Decrease?
+
Debit or credit?
Dr
Cash

Get

Common Stock

Give

E
Cr
+
Cr
Debit
10,000

Credit
10,000

17

Event 2 Note Issued in

Exchange for Cash
Oct. 1 Sierra issued a 3-month,
12%, $5,000 Note Payable to Castle
Bank in exchange for cash.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
18

Event 2 Note Issued in

Exchange for Cash

Oct. 1 Sierra issued a 3-month,

12%, $5,000 Note Payable to Castle
Bank in exchange for cash.

Accounts affected?
Cash
Type of Account? A
Normal balance?
Dr
Increase or Decrease?
+
Debit or credit?
Dr
Cash

Debit

Get

Note Payable

Note Payable
L
Cr
+
Cr
Credit

5,000
Give

5,000

19

Event 3 Purchase of
Office Equipment for Cash
Oct. 2 Sierra acquired office
equipment by paying $5,000 cash to
Superior Sales Co.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
20

Event 3 Purchase of
Office Equipment for Cash

Oct. 2 Sierra acquired office

equipment by paying $5,000 cash to
Superior Sales Co.

Accounts affected?
Equipment Cash
Type of Account? A
A
Normal balance?
Dr
Dr
Increase or Decrease?
+
Debit or credit?
Dr
Cr
Office Equipment
Cash

Get
Give

Debit
5,000

Credit
5,000

21

Event 4 Receipt of Cash

in Advance from Customer
Oct. 2 Sierra received a $1,200
cash advance from R. Knox, a
client.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
22

Event 4 Receipt of Cash

in Advance from Customer
Oct. 2 Sierra received a $1,200
cash advance from R. Knox, a
client.
Accounts
affected?
Cash
Unearned Revenue
Type of Account? A
Normal balance?
Increase or Decrease?
Debit or credit?

Cash

L
Dr
+
Dr

Cr
+
Cr

Get

Unearned revenue

Give

Debit
1,200

Credit
1,200

23

Event 5 Services
Rendered for Cash
Oct. 3 Sierra received $10,000 in
cash from Copa Co. for advertising
services performed
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
24

Event 5 Services
Rendered for Cash

Oct. 3 Sierra received $10,000 in

cash from Copa Co. for advertising
services performed
Accounts affected?
Cash
Type of Account? A
Normal balance?
Dr
Increase or Decrease?
+
Debit or credit?
Dr
Cash

Get

Service Revenue

Give

Service Revenue
E
Cr
+
Cr
Debit
10,000

Credit
10,000

25

Event 6 Payment of Rent

Oct. 3 Sierra paid its office rent
for the month of October in cash,
$900.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
26

Event 6 Payment of Rent

Oct. 3 Sierra paid its office rent
for the month of October in cash,
$900.

Accounts affected?
Cash
Type of Account? A
Normal balance?
Dr
Increase or Decrease?
Debit or credit?
Cr
Rent Expense
Cash

Get
Give

Rent Expense
E (expense)
Dr
+
Dr

Debit
900

Credit
900

27

Event 7 Purchase of
Insurance Policy with Cash
Oct. 4 Sierra paid $600 for a oneyear insurance policy that will expire
next year on Sept. 30.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
28

Event 7 Purchase of
Insurance Policy with Cash

Oct. 4 Sierra paid $600 for a oneyear insurance policy that will expire
next year on Sept. 30.

Accounts affected?
Cash
Type of Account? A
Normal balance?
Dr
Increase or Decrease?
Debit or credit?
Cr
Prepaid Insurance
Give
Cash

Get

Prepaid Insur
A
Dr
+
Dr
Debit
600

Credit
600

29

Event 8 Purchase of
Supplies on Credit
Oct. 5 Sierra purchases a threemonth supply of advertising materials
on account from Aero Supply for
$2,500.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
30

Event 8 Purchase of
Supplies on Credit

Oct. 5 Sierra purchases a threemonth supply of advertising materials

on account from Aero Supply for
$2,500.
Accounts
affected?
Supplies
Accounts Payable
Type of Account? A
Normal balance?
Increase or Decrease?
Debit or credit?
Get
Supplies
AccountsGive
Payable

L
Dr
+
Dr

Cr
+
Cr
Debit
2,500

Credit
2,500

31

Event 9 Hiring of New

Employees
Oct. 9 Sierra hired four new
employees to begin work on Oct.
15.

Accounting transaction
has NOT occurred!
32

Event 10 Payment of
Dividend
Oct. 20 Sierra paid a $500
dividend.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
33

Event 10 Payment of
Dividend
Oct. 20 Sierra paid a $500
dividend.

Accounts affected?
Cash
Type of Account? A
Normal balance?
Dr
Increase or Decrease?
Debit or credit?
Cr

Dividend
Cash

Dividends
E
Dr
+
Dr

Debit
500

Get
Give

Credit
500

34

Event 11 Payment of Cash

for Employee Salaries
Oct. 26 Paid employees working two
weeks, who have earned $4,000 in
salaries.
Accounts affected?
Type of Account?
Normal Balance?
Increase or Decrease?
Debit or credit?
35

Event 11 Payment of Cash

for Employee Salaries
Oct. 26 Paid employees working two
weeks, who have earned $4,000 in
salaries.
Accounts
affected?
Cash
Salaries Expense
Type of Account? A
Normal balance?
Increase or Decrease?
Debit or credit?
Salaries Expense
Give
Cash

Get

Dr
Cr

E (expense)
Dr
+
Dr
Debit
4,000

Credit
4,000

36

1. The effects on the basic

accounting equation of
performing services for cash is

A. increase liabilities and increase

equity
B. increase assets and decrease
equity
C. increase assets and increase
equity
D. increase assets and increase

37

2. Genesis Company buys a

$900 machine on credit. This
transaction will affect the

A. income statement, retained

earnings statement and balance
sheet
B. income statement and retained
earnings statement only
C. balance sheet only
D. income statement only

38

3. Debits

A. decrease assets and increase

liabilities
B. increase assets and decrease
liabilities
C. decrease both assets and liabilities
D. increase both assets and liabilities
39

4. A revenue account

A. is increased by credits
B. has a normal balance of a debit
C. is decreased by credits
D. is increased by debits

40

5. Every account has a left or

credit side and a right or debit
side

A. True
B. False

41

6. Every transaction affects at

least two accounts

A. True
B. False

42

7. Assets are increased with

credits

A. True
B. False

43

This is the end of Chapter

3
Day 1
Work E3 - 7, 9, 11 and P3-4A
For Tuesday, February 12,
2008