Basic Accounting Transaction with EXAMPLES


Indicate the financial statement on which the account belongsincome statement , statement of owners equity , or balance sheet in a format similar to the following. The accounting equation remains balanced because there is a $3,500 increase on the asset side, and a $3,500 increase on the liability and equity side. This change to assets will increase assets on the balance sheet. The change to liabilities will increase liabilities on the balance sheet.

retained earnings

In the debit column for this cash account, we see that the total is $32,300 (20,000 + 4,000 + 2,800 + 5,500). The credit column totals $7,500 (300 + 100 + 3,500 + 3,600). The difference between the debit and credit totals is $24,800 (32,300 – 7,500). The balance in this Cash account is a debit of $24,800. Having a debit balance in the Cash account is the normal balance for that account. Might purchase food items in one large quantity at the beginning of each month, payable by the end of the month. Therefore, it might only have a few accounts payable and inventory journal entries each month.

Parts of the balance sheet equation

Printing Plus did not pay immediately for the supplies and asked to be billed for the supplies, payable at a later date. This creates a liability for the company, Accounts Payable. This liability increases Accounts Payable; thus, Accounts Payable increases on the credit side. Accounts Receivable was originally used to recognize the future customer payment; now that the customer has paid in full, Accounts Receivable will decrease. Accounts Receivable is an asset, and assets decrease on the credit side.

That is, each made on the debit side has a corresponding entry on the credit side. The accounting equation states that a company’s total assets are equal to the sum of its liabilities and its shareholders’ equity.

Introduction to the Accounting Equation

Sal’s entry would debit the Fixed Asset account for $1,000, credit the Cash account for $500, and credit Notes Payable for $500. Debits increase asset and expense accounts and decrease liability, equity, and revenue accounts. Single-entry accounting does not require a balance on both sides of the general ledger. If you use single-entry accounting, you track your assets and liabilities separately.

Why must the accounting equation remain in balance after each transaction?

The accounting equation will always balance because the dual aspect of accounting for income and expenses will result in equal increases or decreases to assets or liabilities.

accounts are listed on the right side of the accounting equation. Total assets will equal the sum of liabilities and total equity. The accounting equation is considered to be the foundation of the double-entry accounting system. Regardless of how the accounting equation is represented, it is important to remember that the equation must always balance. Journalize the six entries that adjust the accounts at December 31. One of the accounts was affected by two different adjusting entries.

Multiple Choice Questions Week 4.docx

Some of the listed transactions have been ones we have seen throughout this chapter. More detail for each of these transactions is provided, along with a few new transactions. Go back over the rules of double-entry accounting and the layout of T-accounts if you have forgotten them. Complete the table below, in which the first six transactions of the business are listed in the left-most column. In today’s electronically enabled business world most organisations produce their financial accounts using a computer program known as an accounting package. Such accounting software produces, at the click of a button, all the reports needed from the initial recording of transactions. Understanding and using these accounting packages properly requires a deep understanding of all the accounting knowledge studied in this course.

The income and retained earnings of the accounting equation is also an essential component in computing, understanding, and analyzing a firm’s income statement. This statement reflects profits and losses that are themselves determined by the calculations that make up the basic accounting equation.

2.2 Recording transactions using T-accounts

Below are examples of items listed on the balance sheet. This straightforward relationship between assets, liabilities, and equity is considered to be the foundation of the double-entry accounting system. The accounting equation ensures that the balance sheet remains balanced.

  • Need a deep-dive on the concept behind this application?
  • The accounting equation remains balanced because there is a $3,500 increase on the asset side, and a $3,500 increase on the liability and equity side.
  • Accounts Payable is used to recognize this liability.
  • Cash was used to pay for salaries, which decreases the Cash account.
  • On the right side, we have revenue, liabilities and owner’s equity.

On a balance sheet, a single line means that amounts are to be added or subtracted. Recording business costs in terms of hours required to complete projects and sales in terms of dollars is an application of the unit of measurement concept. Keeping personal and business records separate is an application of the business entity concept. Indicate whether the sentence or statement is true or false.

Expense Accounts

The owner of the company is almost 100% sure she will receive $2,500 for the job done. You have to record the revenue earned and need to decide how much should be recorded. List all the balance sheet accounts in alphabetical order for easy reference. Describe the effect of each transaction on assets, liabilities, and owner’s equity. While it might seem like debits and credits are reversed in banking, they are used the same way—at least from the bank’s perspective. Liabilities are obligations that the company is required to pay, such as accounts payable, loans payable, and payroll taxes. In this guide, we’ll provide an in-depth explanation of debits and credits and teach you how to use both to keep your books balanced.


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