Accounting Principles I – Analyzing and Recording Transactions - Quick Guides

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Accounting Principles I – Analyzing and Recording Transactions - Page 1 preview image

Study GuideAccounting Principles I–Analyzing and RecordingTransactions1.Analyzing TransactionsWhat does it mean to “analyze a transaction”?In accounting, the first step is always toanalyze each transaction—meaning you look at everybusiness event that affects money, property, or debt.Atransaction(also called aneconomic event) is anything that changes a business’s financialsituation.Before recording anything, accountants ask:•What changed?•Which accounts are affected?•Does the accounting equation still balance?The Accounting Equation (Your Main Rule)Accounting follows one big rule:Assets = Liabilities + Owner’s EquityThis equation mustalways stay balanced, even after every transaction.So, whenever something changes, accountants make sure both sides of the equation still match.Example 1: Starting the BusinessMr. J. Green invests $15,000Mr. Green starts a landscape business by investing$15,000into the company.What happens?

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Study Guide•Assets (Cash)increase by$15,000•Owner’s Equityincreases by$15,000So the equation still balances:Assets (+15,000) = Liabilities (0) + Owner’s Equity (+15,000)This makes sense because the business now has more cash, and Mr. Green’s ownership value in thebusiness increases by the same amount.Example 2: Buying a Truck with Cash + a LoanMr. Green buys a used truck for $15,000He pays$5,000 in cashas a down payment and agrees to pay the remaining$10,000 laterbysigning anote payable(a written promise to pay back the money in 18 months).What changes?Assets•Cash decreasesby$5,000•Vehicles (truck) increaseby$15,000Liabilities•Notes Payable increasesby$10,000Owner’s equity doesnotchange here because this wasn’t an investment or withdrawal—it was apurchase.So after this transaction, the business now has:

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Study Guide•Cash:$15,000 − $5,000 =$10,000•Vehicle:$15,000•Liability (Notes Payable):$10,000•Owner’s Equity:$15,000Andthe equation still balances:Why Businesses Need a Better Recording SystemReal businesses don’t just have two transactions—they can havehundreds or thousands.So accountants need a system that keeps everything organized and accurate.That’s why businesses usedouble-entry bookkeeping.Double-Entry Bookkeeping (The Smart System)Double-entry bookkeeping helps:•keep the accounting equation balanced•check accuracy (since each transaction affects at least two accounts)The key idea:Every transaction is recorded in at least two accounts.What Is an Account?Anaccountis a record that tracks all the changes for one specific item.

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Study GuideFor example:•Cash account → tracks cash increases and decreases•Notes Payable account → tracks how much the business owes•Revenue and Expense accounts → track business performanceTypes of Accounts Businesses UseCompanies keep separate accounts for:Assets (things the business owns)Examples:•Cash•Accounts Receivable•InventoryLiabilities (money the business owes)Examples:•Accounts Payable•Wages Payable•Notes PayableOwner’s Equity accountsExamples:•Owner investments(usually called thecapital accountin a sole proprietorship)•Owner drawings(withdrawals the owner takes out of the business)Revenue accounts (money coming in from business activities)Examples:•Sales Revenue•Service Revenue

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Study GuideExpense accounts (costs of running the business)Examples:•Rent Expense•Wages ExpenseThe General Ledger (The Full Collection)All of the accounts together form thegeneral ledger.Think of the general ledger like a big organized “accounting binder” that contains every account thecompany uses.Chart of Accounts (The Business’s Account List)Tostay organized, each account is given a number.Businesses keep achart of accounts, which is simply:a list of all accountsalong with their account numbersAccount Numbers Can Be Simple or Very DetailedAccount numbers depend on how big andcomplex the company is.•Asole proprietorshipmight have only a few accounts.•Amultinational corporationmight havethousands of accountsand use10-digit or even20-digit account numbersto track things like:○location○department○project code○other categories

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Study GuideCommon Numbering System (Easy to Recognize)Most companies separate accounts by number ranges.A typical small business might use:•100–199→ Asset accounts•200–299→ Liability accounts•300–399→ Owner’s Equity accounts•400–499→ Revenue accounts•500–599→ Expense accountsThis numbering system makes it quicker to find and organize accounts.2. T AccountsWhat is a T Account?AT accountis the simplest way to show how an account changes over time. It’s called aT accountbecause it looks like the letterT.•Theaccount titleandaccount numberare written at the top.•Theleft sideis forDebits (Dr.)•Theright sideis forCredits (Cr.)Easy rule to remember:Debit = LeftCredit =RightWhere Do Increases Go?This is where accounting feels a little tricky at first, but it becomes easier with practice.

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Study GuideAccountants recordincreaseslike this:Debit side (left) increases:•Assets•Expenses•Owner’s DrawingCredit side(right) increases:•Liabilities•Revenues•Owner’s Capital

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Study GuideSo, if you ever forget what to do, ask yourself:1.What account is changing?2.What type of account is it? (asset, liability, etc.)3.Is it increasing or decreasing?Then you’ll know whether to debit or credit.2.1Normal Balance (What “Usually” Happens)Each account type has anormal balance, which means the side where the accountnormallyincreases.Why is it called “normal”?Because most accounts increase more often than theydecrease, so the balance usually ends up onthat side.Accounts with a normaldebitbalance:•Assets•Expenses•Owner’s DrawingAccounts with a normalcreditbalance:•Liabilities•Revenues•Owner’s Capital2.2But Sometimes an Account CanHave an “Unusual” BalanceMost of the time, accounts follow their normal balance side.However, sometimes something unusual happens.Example: Overdrawn Checking Account

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Study GuideA checking account is normally anasset, so it normally has adebit balance.But if the account isoverdrawn(meaning the business spent more money than it had available), thechecking account could actually show acredit balance.So yes—an accountcanend up on the “wrong” side sometimes.2.3Debit and Credit Don’t Mean “Good” or “Bad”In everyday life, the wordsdebitandcreditcan sound like they have certain meanings.For example:•In school, you getcreditfor completing a course.•A great athlete might be “acreditto the team.”•Someone might deservecreditfor trying.So when students start accounting, they often assume:credit = gooddebit = badBut accounting doesnotwork like that.In accounting,debit and credit only mean:•Debit = left side•Credit = right sideThat’s it.2.4Example: Losing Cash (Yes, Even ina Bad Situation)Let’s say a business owner loses$5,000of company cash while gambling.Cash is anasset.Assetsincrease with debits, anddecrease with credits.So losing cash means cashdecreases, which means you must:Credit the Cash account for$5,000

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Study GuideEven though the situation is negative, the word “credit” doesnotmean something positive inaccounting—it just means theright side.3.Double-Entry BookkeepingWhat is Double-Entry Bookkeeping?Double-entry bookkeeping is the main system businesses use to record transactions correctly.The big rule is simple:Every transaction is recorded in at least two places•Debitsgo into one or more accounts•Creditsgo into one or more accountsAnd the total value recorded must match on both sides:Total Debits = Total CreditsBecause of this, the business stays balanced and organized, and accountants can quickly check formistakes.Why It Works So WellIn double-entry bookkeeping:•Thefull valueof every transaction shows up on thedebit sideof one or more accounts•And thesame full valuealso shows up on thecredit sideof one or more accountsThat’s why the combined debit balances of all accounts always equal the combined credit balances ofall accounts.Example 1: Getting aLong-Term LoanAugust 1—The company borrows $50,000A new company takes out a long-term loan for$50,000.

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