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Acct 2210
Chp 3
The Double-Entry
Accounting System
(including Debit &
Credit Notation)
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Describe
business events
using
debit/credit
terminology.
3-1
Debit/Credit Terminology
Claims
Assets
Debit
Credit
+
-
=
Liabilities
Debit
Credit
-
+
+
Equity
Debit
Credit
-
+
In every transaction, the total dollar value of all debits equals
the total dollar value of all credits.
3-2
LO 2
Record
transactions in
T-accounts and
show their
effect on
financial
statements.
3-3
Double-Entry Accounting
Let’s see how
debits and credits
work by looking at
transactions for
Collins Brokerage
Services.
3-4
Collins Brokerage Services began the period with
the following balances: $5,000 in cash, $4,000 in
common stock, and $1,000 in retained earnings.
Assets
Cash
Debit
Credit
Bal. 5,000
=
Liabilities +
Equity
Common Stock
Debit
Credit
4,000 Bal.
Assets
=
Cash
5,000 =
Liab.
n/a
Ret. Earn.
Debit
Credit
1,000 Bal.
+
Equity
Comm. Stk.
Ret. Earn.
+
4,000 +
1,000
3-5
Event 1: Collins acquired $25,000 from the
issue of common stock.
1. Increase assets
(cash).
Asset Source
Transaction
2. Increase equity
(common stock).
Assets
Cash
Debit
Credit
+
25,000
Assets
=
25,000 =
Liab.
n/a
=
+
+
Equity
25,000
Liabilities
+
Revenue - Expenses
n/a
n/a
Equity
Common Stock
Debit
Credit
+
25,000
=
=
Net
Income
n/a
Cash Flow
25,000 FA
3-6
Event 2: Collins purchased $850 of supplies
on account.
1. Increase assets (supplies).
2. Increase liabilities
(accounts payable).
Assets
Supplies
Debit
Credit
+
850
Assets =
850 =
Liab.
+
850 +
=
Equity
n/a
Asset Source
Transaction
Liabilities
+
Accounts Payable
Debit
Credit
+
850
Revenue - Expenses =
n/a
n/a
=
Equity
Net
Income
n/a
Cash Flow
n/a
3-7
Event 3: Collins collected $1,800 as an advance
to provide future services over a one-year period
starting March 1.
1. Increase assets (cash).
Asset Source
Transaction
2. Increase liabilities
(unearned revenue).
Assets =
1,800 =
Liab.
+
1,800 +
Assets
Cash
Debit
Credit
+
1,800
Equity
n/a
Revenue - Expenses
n/a
n/a
=
Liabilities
+
Unearned Revenue
Debit
Credit
+
1,800
=
=
Net
Income
n/a
Cash Flow
1,800 OA
Equity
3-8
Event 4: Collins provided $15,760 of services on
account.
1. Increase assets (accounts
receivable).
2. Increase stockholders’ equity
(consulting revenue).
Assets
Accounts Receivable
Debit
Credit
+
15,760
Assets =
15,760 =
Liab.
n/a
+
+
=
Liabilities
Debit
-
Equity
15,760
Asset Source
Transaction
+
Credit
+
Revenue - Expenses =
15,760 n/a
=
Equity
Consulting Revenue
Debit
Credit
+
15,760
Net
Income
15,760
Cash Flow
n/a
3-9
Event 5: Collins purchased land for $26,000
cash.
Asset
Exchange
Transaction
1. Increase assets (land).
2. Decrease assets (cash).
Assets
=
Cash
Debit
+
Assets
(26,000) +
Liabilities
+
Equity
Land
Credit
26,000
=
26,000 =
Liab.
n/a
Debit
+
26,000
+
+
Equity
n/a
Credit
-
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
(26,000) IA
3-10
Event 6: Collins paid $1,200 cash for a one-year
insurance policy with coverage starting August 1.
Asset
Exchange
Transaction
1. Increase assets
(prepaid insurance).
2. Decrease assets (cash).
Assets
=
Cash
Debit
+
Assets
(1,200) +
+
Equity
Prepaid Insurance
Debit
Credit
+
1,200
Credit
1,200
=
1,200 =
Liabilities
Liab.
n/a
+
+
Equity
n/a
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
(1,200) OA
3-11
Event 7: Collins collected $13,400 from
accounts receivable.
Asset
Exchange
Transaction
1. Increase assets (cash).
2. Decrease assets
(accounts receivable).
Assets
Cash
Debit
+
13,400
Assets
13,400 +
Liabilities
+
Equity
Accounts Receivable
Debit
Credit
+
13,400
Credit
-
=
(13,400) =
=
Liab.
n/a
+
+
Equity
n/a
Revenue - Expenses =
n/a
n/a
=
Net
Income
n/a
Cash Flow
13,400 OA
3-12
Event 8: Collins paid $9,500 for salaries
expense.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity (salaries
expense).
Assets
=
Cash
Debit
Credit
+
9,500
Assets =
(9,500) =
Liab.
n/a
+
+
Equity
(9,500)
Liabilities
+
Revenue - Expenses =
n/a
9,500 =
Equity
Salaries Expense
Debit
Credit
+
9,500
Net
Income
(9,500)
Cash Flow
(9,500) OA
3-13
Event 9: Collins paid an $800 cash
dividend.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease equity (dividends).
Assets
=
Cash
Debit
Credit
+
800
Assets =
(800) =
Liab.
n/a
+
+
Equity
(800)
Liabilities
+
Revenue - Expenses =
n/a
n/a
=
Equity
Dividends
Debit
Credit
+
800
Net
Income
n/a
Cash Flow
(800) FA
3-14
Event 10: Collins paid $850 to settle
accounts payable.
1. Decrease assets (cash).
Asset Use
Transaction
2. Decrease liabilities
(accounts payable).
Assets
=
Cash
Debit
Credit
+
850
Assets =
(850) =
Liab.
+
(850) +
Equity
n/a
Liabilities
Accounts Payable
Debit
Credit
+
850
+
Revenue - Expenses =
n/a
n/a
=
Equity
Net
Income
n/a
Cash Flow
(850) OA
3-15
Event 11: Collins recognized $1,900 of other
operating expenses on account.
1. Increase liabilities
(accounts payable).
2. Decrease equity
(advertising expense).
Assets
Assets =
n/a
=
Liab.
+
1,900 +
=
Equity
(1,900)
Claims
Exchange
Transaction
Liabilities
+
Accounts Payable
Debit
Credit
+
1,900
Revenue - Expenses =
n/a
1,900 =
Equity
Other Oper. Exp.
Debit
Credit
+
1,900
Net
Income
(1,900)
Cash Flow
n/a
3-16
Adjustment 1: Collins Consultants recognized
$750 accrued interest revenue.
1. Increase assets (interest
receivable).
Asset Source
Transaction
2. Increase equity (interest
revenue).
=
Assets
Liabilities
+
Interest Receivable
Equity
Interest Revenue
Debit
Credit
Debit
Credit
+
-
-
+
750
Assets =
750 =
750
Liab.
n/a
+
+
Equity
750
Revenue - Expenses =
750 n/a
=
Net
Income
750
Cash Flow
n/a
3-17
Adjustment 2: As of December 31, 2013, Collins
had earned $1,500 of the $1,800 of revenue that
it deferred in Event 3.
Claims
Exchange
Transaction
1. Decrease liabilities (unearned
revenue).
2. Increase equity (consulting
revenue).
$ 1,800  12 months = $150 per month
$
150   10 months = $1,500 revenue
Assets
Assets =
n/a
=
Liab.
+
(1,500) +
=
Equity
1,500
Liabilities
Unearned Revenue
Debit
Credit
+
1,500
+
Revenue - Expenses =
1,500 n/a
=
Equity
Consulting Revenue
Debit
Credit
+
1,500
Net
Income
1,500
Cash Flow
n/a
3-18
Adjustment 3: As of December 31, 2013, Collins
had $800 of accrued salaries expense that will be
paid in 2014.
1. Increase liabilities (salaries
payable).
Claims
Exchange
Transaction
2. Decrease equity (salaries
expense).
Assets =
n/a
=
Liab.
+
800 +
Assets
Equity
(800)
Revenue - Expenses =
n/a
800 =
=
Liabilities
Net
Income
(800)
+
Salaries Payable
Cash Flow
n/a
Equity
Salaries Expense
Debit
Credit
Debit
Credit
-
+
+
-
800
800
3-19
Adjustment 4: As of December 31, 2013, Collins had used
$500 of the $1,200 of insurance coverage that it had paid for
in Event 6.
1. Decrease assets (prepaid
insurance).
Asset Use
Transaction
2. Decrease equity (insurance
expense).
$ 1,200  12 months = $100 per month
$
100   5 months = $500 insurance expense
Assets
Prepaid Insurance
Debit
Credit
+
500
Assets =
(500) =
Liab.
n/a
+
+
=
Equity
(500)
Liabilities
+
Revenue - Expenses =
n/a
500 =
Equity
Insurance Expense
Debit
Credit
+
500
Net
Income
(500)
Cash Flow
n/a
3-20
Adjustment 5: As of December 31, 2013, a physical count of
supplies on hand revealed that $125 worth of supplies were
available for future use.
1. Decrease assets (supplies).
Asset Use
Transaction
2. Decrease equity (supplies
expense).
Asset
Ending
Asset
Available =
Balance
Used
for Use
850 = $
850 - $
125 = $
725
Beginning
+ Purchases =
Balance
$
-
+ $
Assets
Supplies
Debit
Credit
+
725
Assets =
(725) =
Liab.
n/a
+
+
=
Equity
(725)
Liabilities
+
Revenue - Expenses =
n/a
725 =
Equity
Supplies Expense
Debit
Credit
+
725
Net
Income
(725)
Cash Flow
n/a
3-21
LO 3
Record
transactions using
the general journal
format and show
their effect on the
financial
statements.
3-22
The General Journal
Accountants initially
record data from
source documents
into a journal.
Special Journals
General Journals
Date
Aug. 1
Account Title
Cash
Service Revenue
Debit
1,000
Credit
1,000
3-23
3-24
3-25
3-26
LO 4
Prepare a trial
balance and
explain how it is
used to prepare
financial
statements.
3-27
3-28
3-29
3-30
3-31
3-32
3-33
LO 5
Use a return on
assets ratio, debt to
assets ratio, and a
return on equity ratio
to analyze financial
statements.
3-34
Return on Assets Ratio
Evaluating performance requires considering
the size of the investment base used to produce
the income.
Net Income
Total Assets
This ratio measures the relationship
between the level of income and the
size of the investment. A larger ratio
means the company did a better job
of managing its assets.
3-35
Debt to Assets Ratio
Borrowing money is risky business. This
ratio helps evaluate the level of debt risk.
Total Debt
Total Assets
A smaller ratio indicates that there is
less debt risk for the company.
3-36
Return on Equity Ratio
Owners are interested in this ratio to
determine their return on their
investment in the company.
Net Income
Stockholders’
Equity
A larger ratio indicates that the
owners have a higher return on their
investment.
3-37
Stockholders vs. Creditors
Stockholders like a lot of
debt if the company can
take advantage of
positive financial
leverage.
Creditors prefer less
debt and more equity
because equity
represents a buffer of
protection.
3-38
End of Chapter Three
3-39