Business AccountsAn account is a location within an accounting system in which the increases and decreases in a specific asset, liability, or owner’s equity are recorded and stored.

All the accounts of a business are grouped together in a ledger.

A ledger is a book or a file containing a separate page for each business account. The ledger serves as a permanent record of financial transactions.

That sounds a little confusing.

Chart of AccountsTo keep track of its accounts, a business develops a Chart of Accounts.Let’s take another look at the list of accounts for Roadrunner Delivery Service Assets = Liabilities + Owner’s Equity

Cash in BankAccounts ReceivableComputer EquipmentOffice EquipmentDelivery Equipment

Accounts Payable M. Sanchez, Capital

We should probably make this look a little

more official.

Numbering the Chart of Accounts

All Liability accounts begin with 2.

All Owner’s Equity accounts begin with 3.

All Asset accounts begin with 1.

All Revenue accounts begin with 4.

All Expense accounts begin with 5.

Let’s see what the Roadrunner Delivery Service Accounts would look like.

Roadrunner Delivery Service Chart of Accounts

Chart of Accounts

Roadrunner Delivery Service

Assets

Cash in BankAccounts Receivable – City NewsAccounts Receivable – Green CompanyComputer EquipmentOffice EquipmentDelivery Equipment

101105110115120125

Liabilities

Accounts Payable – Beacon AdvertisingAccounts Payable – North Shore Auto

201205

Owner’s Equity

M. Sanchez, CapitalM. Sanchez, WithdrawalsIncome Summary

301302303

Revenue

Delivery Revenue401

Expenses

Advertising ExpenseMaintenance ExpenseRent ExpenseUtilities Expense

501505510515

Terms You Need to Know

Double-Entry Accounting A system of recordkeeping in which each business transaction affects at least two accounts.

T Account Shows the dollar increase or decrease in an account that is caused by a transaction. It is called a T Account because it is shaped like a T.

Debit and CreditDebit

An amount entered on the left side of the T account.

Credit

An amount entered on the right side of the T account.

Let’s take a look at a T account.

Account Name

Left Side

Debit Side

Right Side

Credit Side

Debit means leftside

Credit mean

s rightside

Rules for Asset Accounts

An asset account is increased on the debit side.

An asset account is decreased on the credit side.

The normal balance for an asset account is the debit side.

Asset Account

Debit Side Credit Side

NormalBalance

+ -

Increase on the

leftside

Decrease on the rightside

Normal balance on the debit

side

Rules for Liability Accounts

A liability account is increased on the credit side.

A liability account is decreased on the debit side.

The normal balance for a liability account is the credit side.

Liability Account

Debit Side Credit Side

NormalBalance

- +

Decrease on the

leftside

Increase on the rightside

Normal balance on the creditside

Rules for Owner’s Equity Accounts

An owner’s equity account is increased on the credit side.

An owner’s equity account is decreased on the debit side.

The normal balance for an owner’s equity account is the credit side.

Owner’s Equity Account

Debit Side Credit Side

NormalBalance

- +

Decrease on the

leftside

Increase on the rightside

Normal balance on the creditside

Summary of Rules for Debits and Credits

Asset Account

Debit Side

+NormalBalance

Credit Side

-

Liability Account

Debit Side Credit Side

+-NormalBalance

Owner’s Equity Account

Debit Side Credit Side

+-NormalBalanceLet’s review the basic accounting equation.

= +

Hey, the accounts on the left side of the equation are

increased on the left side, and the accounts on the right side of the equation are increased on

the right side.The normal balance side is the increase

side

Debits and Credits for Business Transactions

Before we can apply the rules of debits and credits to business transactions, there is one very important rule that needs to be pointed out.

For every

debit there

must be a

credit of

equal

value.

That’s very important.

Don’t forget it!

Investments by the Owner

Business Transaction 1

Maria Sanchez took $25,000 from her personal savings and deposited that amount to open a business account in the name of Roadrunner Delivery Service.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Cash in Bank and M. Sanchez, Capital

Cash in Bank is an asset account and M. Sanchez, Capital is an owner’s equity account

Cash in Bank is increased by $25,000 and M. Sanchez, Capital is increased by $25,000

Asset accounts are increased on the debit side and owner’s equity accounts are increased on the credit side

Cash in Bank

+ -25,000

M. Sanchez, Capital

+-25,000

25,000

Debit

= 25,000

Credit

Debits equal credits

Additional Investments by the Owner

Business Transaction 2

The owner, Maria Sanchez, took two telephones valued at $200 each (total $400) from her home and transferred them to the business as Office Equipment.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Office Equipment and M. Sanchez, Capital

Office Equipment is an asset account and M. Sanchez, Capital is an owner’s equity account

Office Equipment is increased by $400 and M. Sanchez, Capital is increased by $400

Asset accounts are increased on the debit side and owner’s equity accounts are increased on the credit side

Office Equipment

+ -400

M. Sanchez, Capital

+-400

400Debit = 400

Credit

Debits equal credits

Cash Payment TransactionsBusiness Transaction 3

Roadrunner issued a $3,000 check to purchase a computer system.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Computer Equipment and Cash in Bank

Computer Equipment is an asset account and Cash in Bank is an asset account

Computer Equipment is increased by $3,000 and Cash in Bank is decreased by $3,000

Asset accounts are increased on the debit side and asset accounts are decreased on the credit side

Computer Equipment

+ -3,000

Cash in Bank

-+3,000

3,000Debit = 3,000

Credit

Debits equal credits

Buying on Credit TransactionsBusiness Transaction 4

Roadrunner bought a used truck on account from North Shore Auto for $12,000.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Delivery Equipment and Accounts Payable

Delivery Equipment is an asset account and Accounts Payable is a liability account

Delivery Equipment is increased by $12,000 and Accounts Payable is increased by $12,000

Asset accounts are increased on the debit side and liability accounts are increased on the credit side

Delivery Equipment

+ -12,000

Accounts Payable

+-12,000

12,000

Debit

= 12,000

Credit

Debits equal credits

Selling on Credit Transactions

Business Transaction 5

Roadrunner sold one telephone to Green Company for $200 on account.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Accounts Receivable and Office Equipment

Accounts Receivable is an asset account and Office Equipment is an asset account

Accounts Receivable is increased by $200 and Office Equipment is decreased by $200

Asset accounts are increased on the debit side and asset accounts are decreased on the credit side

Accounts Receivable

+ -200

Office Equipment

-+200

200Debit = 200

Credit

Debits equal credits

Credit Payment TransactionsBusiness Transaction 6

Roadrunner issued a check for $350 in partial payment of the amount owed to its creditor, North Shore Auto.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Cash in Bank and Accounts Payable

Cash in Bank is an asset account and Accounts Payable is a liability account

Cash in Bank is decreased by $350 and Accounts Payable is decreased by $350

Asset accounts are decreased on the credit side and liability accounts are decreased on the debit side

Cash in Bank

+ -350

Accounts Payable

+-350

350Credit= 350

Debit

Debits equal credits

Credit Receivable TransactionsBusiness Transaction 7

Roadrunner received and deposited a check for $200 from Green Company. The check received was full payment for the telephone sold on account in transaction 5.

1) Identify

2) Classify

3) Increase or Decrease

4) Debit and Credit Rule

5) Do Debits Equal Credits

Accounts affected are Cash in Bank and Accounts Receivable

Cash in Bank is an asset account and Accounts Receivable is an asset account

Cash in Bank is increased by $200 and Accounts Receivable is decreased by $200

Asset accounts are increased on the debit side and asset accounts are decreased on the credit side

Cash in Bank

+ -200

Accounts Receivable

-+200

200Debit = 200

Credit

Debits equal credits

Summary of Debit and Credit Transactions

Computer Equipment

Offi ce Equipment

Delivery Equipment

Acounts Payable

M. Sanchez, Capital

Cash in Bank

Accounts Receivable

(1) 25,000

25,000 (1)

(2) 400

400 (2)

(3) 3,000

3,000 (3)

(4) 12,000

12,000 (4)

(5) 200

200 (5) (6) 350

350 (6)(7) 200

200 (7)

Bal

Bal

Bal

Bal

Bal

Bal

Bal

21,850

------

3,000

200

12,000

11,650

25,400

Total Debits

37,050

Total Credits

37,050=

Assets Liabilities Owner’s Equity

37,050 11,650 25,400= +

Problem 4-5

Offi ce Equipment

Offi ce Furniture

Grooming Equipment

Accts Pay - Dogs & Cats

A. Schultz, Capital

Cash in Bank

Accts Rec - M. Giles

(1) 45,000

45,000 (1)(2) 8,500

8,500 (2)(3) 85 85 (3)

(4) 200

200 (4)

(5) 3,000

3,000 (5)

(6) 200

200 (6)

(7) 1,500

1,500 (7)

Bal

Bal

Bal

Bal

Bal

Bal

Bal

40,515

100

1,500

85

8,500

5,500

45,200

Total Debits

50,700

Total Credits

50,700=

Assets Liabilities Owner’s Equity

50,700 5,500 45,200= +

(8) 100

100 (8)