Chapter 4

Chapter 4
Transactions That Affect Assets, Liabilities,

and Owners Capital
What Youll Learn

Prepare a chart of accounts.
Explain the purpose of double-entry accounting.
Identify the normal balance of accounts.
Use T accounts to illustrate the rules of debit and

credit for asset accounts, liability accounts, and the
owners capital account and to express the accounting
equation.
Use T accounts to analyze transactions that affect
assets, liabilities, and the owners capital account.
Transactions That Affect Assets, Liabilities,
and Owners Capital
What Youll Learn

Calculate the account balances after recording
business transactions.
Define the accounting terms introduced in this

chapter.
Section 1
Accounts and the Double-Entry Accounting
System
What Do You Think?

When Panda Restaurant Group opens a new store, how
do you think its assets and liabilities are affected?
If Panda Group uses existing cash, it will exchange
one asset (cash) for other assets (store equipment,
buildings/rental space, fixtures, etc.) Using this method
total assets will not change.
If Panda Group uses credit, it would increase
liabilities (accounts payable) and increase assets (store
equipment, furniture, etc.)
Panda Restaurant Group
What Do You Think?

Based on what you have reviewed about transactions,
why do you think we use a double-entry accounting
system?
Each transaction affects at least two accounts, so
transactions must be entered in at least two accounts
Accounts and the Double-Entry Accounting System
Main Idea
The double-entry accounting system uses debits and
credits. Debit means left side and credit means right
side.
You Will Learn

about the chart of accounts.
about the double-entry accounting system.
Key Terms
chart of accounts
ledger
double-entry accounting
debit
credit
T account
normal balance
The Chart of Accounts

A chart of accounts is a list of accounts used by a
business.
Accounts are grouped together in a ledger, also known
as a general ledger. Keeping the books refers to
maintaining accounts in the ledger.
Accounts are easier to locate in the ledger if they are
numbered. A typical numbering system is as follows:
Asset accounts begin with 1.
Liability accounts begin with 2.
Owners equity accounts begin with 3.
Revenue accounts begin with 4.
Expense accounts begin with 5.
Chart of Accounts
A small company
may use a 3 digit
system
A very large
corporation may
use 35 or more
digits
Double-Entry Accounting
If a business has many accounts, accountants use the
double-entry accounting system to analyze and record
a transaction.
The double-entry accounting system recognizes both

the debit and credit side of a business transaction.
T Accounts
The T account is a tool for using the double-entry
accounting system. It shows the dollar increase and
decrease caused by a transaction.
The T account gets its name from being shaped like a T:
Account name is on the top.
The left side is ALWAYS used for debits.
The right side is ALWAYS used for credits.
The Rules of Debit and Credit

In double-entry accounting, for each debit in one
account, there must be an equal credit in another
account.
The rules of debit and credit vary depending on the type

of account (asset, liability, owners capital)
Each account has a normal balance to record

increases to the account. The word normal in this case
means usual.
Rules for Asset Accounts

Asset accounts follow three rules for debit and credit:
It is increased on the debit side (left side).
It is decreased on the credit side (right side).
The normal balance is the increase or debit side.
Because the increase side is always on the debit side,
asset accounts have a normal debit balance.
In the T accounts, does a plus sign mean debit

and a minus sign mean credit?
No. The plus sign means the increase side and

the minus sign means the decrease side.
The debit side can be an increase or a
decrease, depending on the account.
For assets, a debit is an increase.
You should know:
T accounts dont usually have shading
T accounts dont have plus or minus signs
T accounts dont have the terms debit or credit

written on them.
They are included here to reinforce learning

Rules for Liability and Owners Capital Accounts

Liability and owners capital accounts follow three rules
for debit and credit:
It is increased on the credit side (right side).
It is decreased on the debit side (left side).
The normal balance is the increase or credit side.
What happens if assets increase and liabilities

remain the same?
Owners Equity increases
Why do liability accounts and capital accounts

both have normal credit balances?
Both are financial claims to assets
Same Greene, Capital starts with a balance of

$1,000. In one week, the account is debited for
$200, credited for $500, and debited for $100.
What is the new account balance?

A credit balance of $1,200
Reinforce the Main Idea
For Asset Accounts

Normal balance: debit (left)
Increase side: debit (left)
Decrease side: credit (right)
For Liability and Owners Capital Accounts

Normal balance: credit (right)
Increase side: credit (right)
Decrease side: debit (left)
Do the Math
1. List the account(s) debited and the amount(s).

Debit computer equipment for $3,200
Debit accounts payable for $1,600
2. List the account(s) credited and the amount(s).

Credit cash for $3,200
Credit cash for $1,600
Problem 4-1
Accounts Receivable asset, debit, credit, debit
Office Equipment asset, debit, credit, debit
Accounts Payable liability, credit, debit, credit
R. Lewis, Capital owners capital, credit, debit, credit

Additional
Your company purchases inventory for $100 on credit.
Apply the double-entry accounting system to this

equation.
Debit inventory $100

Credit accounts payable $100
Key Terms Review

chart of accounts
A list of all accounts used by a business.
ledger
A group of accounts; also referred to as a general
ledger.
double-entry accounting
A system that recognizes the different sides of
business transactions as debits and credits.
debit
An entry on the left side of an account.
Key Terms Review

credit
An agreement to pay for a purchase at a later
time; an entry on the right side of an account.
T account
A visual representation of a ledger account. The
T account is a tool used to analyze transactions.
normal balance
The increase side of an account. The word
normal here means usual.
Section 1 Review
What is the order of account categories on the
chart of accounts?
Assets, liabilities, owners equity, revenue, expenses
What is the normal side balance for assets?
Debit
What is the normal side balance for liabilities?
Credit
What is the normal side balance for owners
equity?
Credit
Applying the Rules of Debit and Credit
Main Idea
Use T accounts to analyze transactions.
You Will Learn

a step-by-step method for analyzing transactions.
how to apply the method to asset, liability, and
owners capital transactions.
Section 2
What Do You Think?

How many T accounts would you need to analyze
a transaction?
At least two
Why is it important to analyze transactions?

To assess a companys financial condition
To determine profits
To determine losses
Asset and Equities Transaction

When analyzing business transactions, you should:
apply the rules of debit and credit
a debit in one account is offset by a credit in
another account
complete the entry in T-account form.
Assets and Owners Capital
Use a T account to analyze an owners investment in the
business:
business:
business:
Business Transaction 2
Why is this considered a business transaction if the
phones are already Marias property?
As a business entity, the owners personal financial
activities are separate from those of the business
True or False: An increase in assets will always

increase owners capital.
False (i.e. an increase in assets would increase
liabilities if the assets were purchased on credit)

When analyzing business transactions, you should follow
this method:
When analyzing business transactions, you should follow this
method:
When analyzing business transactions, you should follow this
method:
Assets and Liabilities
Increase an asset and decrease another asset:
Does a transaction always change both sides of the
accounting equation?
No. A transaction that affects two assets will not
change both sides.
What is the Cash in Bank balance after this

transaction?
$22,000
Increase an asset and increase a liability:
You usually make a down payment to purchase a
vehicle, but this transaction has been simplified.
Which account would be used for a down payment?

Cash in Bank
Would it be debited or credited?

Credited
When Roadrunner makes the first truck payment, what
account will be debited?
Accounts payable North Shore Auto
What account will be credited?

Cash in Bank
Why is Accounts Receivable an asset?

It represents a claim to the assets of other people or
businesses.
Decrease a liability and decrease an asset:
What is the balance of Accounts Payable North
Shore Auto after this transaction?
$11,650
Chapter 4 Homework
Finish problems 4-3, 4-4, 4-5
Calculate the accounting equation after all 7 transactions.

$37,050 (assets) = $11,650 (liabilities) + $25,400 (owners equity)
Do the Math
$16,000 (assets) = $6,000 (liabilities) + $10,000 (OE)
Assets: Cash in Bank ($8,000) + Equipment ($8,000)

Problem 4-2
1. a. Office Equipment (asset) is increased (debit)

b. Accounts Payable (liability) is increased (credit)
2. a. Office Furniture (asset) is increased (debit)

b. Alice Roberts, Cap. (OE) is increased (credit)
3. a. Accounts Payable (liability) is decreased (debit)

b. Cash in Bank (asset) is decreased (credit)
Section 2 Quiz
Use T accounts to illustrate transaction analysis. Determine the
debits and credits for each business transaction.
1. Owner Mischa Maling transferred $5,000 in personal funds to

the business.
Debit Cash in Bank $5,000; Credit Mischa Maling, Capital $5,000
2. Bought a computer for $1,200 cash.
Debit Computer Equipment $1,200; Credit Cash in Bank $1,200
3. Bought another computer on account from Ace, Inc. for $1,100.
Debit Comp. Equip. $1,100; Credit Accts Payable Ace, Inc. $1,100
4. Paid Ace, Inc. invoice in full.
Debit Accts Payable Ace, Inc. $1,100; Credit Cash in Bank $1,100
5. Owner Mischa Maling transferred her home computer equipment
worth $500 to the business.
Debit Computer Equipment $500; Credit Mischa Maling, Cap. $500
Chapter 4 Review
Question 1
Identify the normal balance for each of the following
accounts by indicating Debit or Credit.
Cash in Bank __________
Accounts Receivable __________
Richard Sims, Capital __________
Computer Equipment __________
1st National Bank (mortgage on building) __________
Car Wash Equipment __________
Building __________
Office Supplies __________
Chapter 4 Review
Answer 1
Step 1: Determine the account classification of each account.
Step 2: Determine the normal balance side.

a. Cash in Bank is an asset account. Since assets are on
the left side of the accounting equation, they increase on
the left side of the account and their normal balance is
the debit side.
b. Accounts Receivable is an asset account. Assets
increase on the left side of the account so their normal
balance is debit.
Chapter 4 Review
c. Richard Sims, Capital is an owners capital account.

Capital accounts are on the right side of the accounting
equation. Therefore, they increase on the right side of the
account and their normal balance is the credit side.
d. Computer Equipment is an asset account. Assets increase

on the left side of the account so their normal balance is
debit.
d. The First National Bank account for the mortgage is a

liability account. Liabilities are on the right side of the
accounting equation. Therefore, increases are shown on the
right side of the account and their normal balance is the
credit side.
Chapter 4 Review
f. Car Wash Equipment is an asset account. Increases
for assets appear on the left side of the account so their
normal balance is debit.
f. Building is an asset account. Increases for assets appear on

the left side of the account so their normal balance is debit.
f. Office Supplies is an asset account. Increases for

assets appear on the left side of the account so their
normal balance is debit.
Chapter 4 Review
Question 2
On October 18 Dicks Car Wash bought $10,000 worth of car wash
equipment by issuing Check #111. Using the Business Transaction
Analysis method, list the steps you would use to record this
transaction. Assume that asset accounts for Cash in Bank and Car
Wash Equipment exist.
Chapter 4 Review
Step 1: Identify the accounts affected.
The accounts Car Wash Equipment and Cash in Bank are affected.
Step 2: Classify the accounts affected.

Car Wash Equipment is an asset account. Cash in Bank is an asset
account
Step 3: Determine the amount of increase or decrease for each account

affected.
Car Wash Equipment is increased by $10,000. Cash in Bank is
decreased by $10,000.
Step 4: Which account is debited and for what amount?

Increases in asset accounts are recorded as debits. Debit Car Wash
Equipment for $10,000.
Step 5: Which account is credited and for what amount?

Decreases in asset accounts are recorded as credits. Credit Cash in
Bank for $10,000.
Chapter 4 Review
Question 3
What does double-entry accounting mean?
Every transaction affects at least two accounts and must

have a debit and a credit.
Chapter 4 Review
Question 4
If a business were to buy supplies for cash, what two things would
happen?
First, the amount of supplies would go up, and since supplies are
assets, the increase to the Supplies account would be recorded as
a debit.
Second, the balance in the Cash in Bank account would go down,
and since cash is an asset, the decrease in Cash in Bank would be
recorded as a credit.
Chapter 4 Homework
Finish problems 4-6, 4-7

Chapter 4

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Chapter 4

Transactions That Affect Assets, Liabilities,

What Youll Learn

Identify the normal balance of accounts.

Use T accounts to illustrate the rules of debit and

What Youll Learn

Define the accounting terms introduced in this

What Do You Think?

What Do You Think?

You Will Learn

The Chart of Accounts

The double-entry accounting system recognizes both

The Rules of Debit and Credit

The rules of debit and credit vary depending on the type

Each account has a normal balance to record

Rules for Asset Accounts

In the T accounts, does a plus sign mean debit

No. The plus sign means the increase side and

You should know:

T accounts dont usually have shading

T accounts dont have plus or minus signs

T accounts dont have the terms debit or credit

They are included here to reinforce learning

Rules for Liability and Owners Capital Accounts

Rules for Liability and Owners Capital Accounts

What happens if assets increase and liabilities

Rules for Liability and Owners Capital Accounts

Why do liability accounts and capital accounts

Rules for Liability and Owners Capital Accounts

Same Greene, Capital starts with a balance of

What is the new account balance?

For Asset Accounts

For Liability and Owners Capital Accounts

1. List the account(s) debited and the amount(s).

2. List the account(s) credited and the amount(s).

Accounts Receivable asset, debit, credit, debit

Office Equipment asset, debit, credit, debit

Accounts Payable liability, credit, debit, credit

R. Lewis, Capital owners capital, credit, debit, credit

Your company purchases inventory for $100 on credit.

Apply the double-entry accounting system to this

Debit inventory $100

Key Terms Review

Key Terms Review

You Will Learn

What Do You Think?

Why is it important to analyze transactions?

Asset and Equities Transaction

True or False: An increase in assets will always

Asset and Equities Transaction

What is the Cash in Bank balance after this

Which account would be used for a down payment?

Would it be debited or credited?

What account will be credited?

Why is Accounts Receivable an asset?

Calculate the accounting equation after all 7 transactions.

$16,000 (assets) = $6,000 (liabilities) + $10,000 (OE)

Assets: Cash in Bank ($8,000) + Equipment ($8,000)

1. a. Office Equipment (asset) is increased (debit)

2. a. Office Furniture (asset) is increased (debit)

3. a. Accounts Payable (liability) is decreased (debit)

1. Owner Mischa Maling transferred $5,000 in personal funds to

Step 2: Determine the normal balance side.