Accounting I Lesson Plan
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1 Accounting I Lesson Plan Name: Terry Wilhelmi Day/Date: Topic: Analyzing Transactions into Debit and Credit Parts Unit: Chapter 4 I. Objective(s): By the end of today s lesson, the student will be able to: define accounting terms related to analyzing transactions into debit and credit parts. identify accounting practices related to analyzing transactions into debit and credit parts. use T accounts to analyze transactions showing which accounts are debited or credited for each transaction. verify the equality of debits and credits for each transaction. II. Materials: Textbook Workbook Transparencies III. Anticipatory Set: We have learned how business transactions affect accounts in an accounting equation. This procedure is not practical in an actual accounting system. One reason is that the number of accounts used by most businesses would make the accounting equation cumbersome to use. Therefore, a separate record is commonly used for each account. IV. Learning Activities:
2 2 ACCOUNTS The accounting equation can be represented as a T : Always draw T accounts when analyzing transactions to see the debit and credit sides. Account - a record summarizing all the information pertaining to a single item in the accounting equation. Transaction - a business activity that changes assets, liabilities, or owner s equity. * transactions change the balances of accounts in the accounting equation. * after each transaction, the accounting equation must remain in balance. T account - an accounting device used to analyze transactions. * the T account is the basic device used to analyze the effect of transactions on accounts. T Account DEBIT SIDE CREDIT SIDE Debit - an amount recorded on the left side of a T account. Credit - an amount recorded on the right side of a T account.
3 3 The normal balance side of an asset, liability, or capital account is based on the location of the account in the accounting equation. ASSETS LIABILITIES NORMAL NORMAL BALANCE BALANCE OWNER S CAPITAL ACCOUNT Debit side Credit side NORMAL BALANCE * Asset accounts have normal debit balances (left side) because assets are on the left side of the accounting equation. * Liability accounts have normal credit balances (right side) because liabilities appear on the right side of the accounting equation. * The owner s capital account has a normal credit balance (right side) because the capital account appears on the right side of the accounting equation.
4 4 When drawing T accounts, stack the accounts instead of writing them horizontally to make it easier to recognize debits and credits. The sides of a T account are also used to show increases and decreases in account balances. ASSETS LIABILITIES INCREASE DECREASE DECREASE INCREASE OWNER S CAPITAL ACCOUNT Debit side DECREASE Credit side INCREASE Two basic accounting rules regulate increases and decreases of account balances: 1) Account balances increase on the normal balance side of an account. 2) Account balances decrease on the side opposite the normal balance side of an account. * Asset accounts have normal debit balances; therefore, asset accounts increase on the debit side and decrease on the credit side.
5 5 * Liability accounts have normal credit balances; therefore, liability accounts increase on the credit side and decrease on the debit side. * Owner s capital account has a normal credit balance; therefore, the capital account increases on the credit side and decreases on the debit side. Assignment: Be sure you know and understand: terms 1-3, pg. 66. questions 1-5, pg. 66. Case 1, pg. 66 in class. read pages 55-65, including Personal Visions in Business.
6 6 ANALYZING HOW TRANSACTIONS AFFECT ACCOUNTS Before a transaction is recorded in the records of a business, the information is analyzed to determine which accounts are changed and how. Each transaction changes the balances of at least two accounts and debits equal credits for each transaction. Four questions are used in analyzing a transaction into its debit and credit parts: 1) What accounts are affected? A list of accounts used by a business is called a Chart of Accounts. (ex. pg. 18) 2) How is each account classified? Asset, liability, owner s equity, revenue, or expense. 3) How is each account balance changed? Increased or decreased. 4) How is each amount entered in the accounts? The amount is either debited or credited to the account.
7 7 Received from Owner as an Investment $10,000 (pg. 56) Ben Furman, Capital +$10,000 +$10,000 (investment) Any Asset Owner s Capital Increase Decrease Decrease Increase Ben Furman, Capital +$10,000 Decrease Decrease +$10,000 1) What accounts are affected? and Ben Furman, Capital. 2) How is each account classified? is an asset with a normal debit balance. Ben Furman is an owner s equity account with a normal credit balance. 3) How is each account balance changed? and Capital accounts are increased. 4) How is each amount entered in the account? The asset account,, has a normal debit balance and is increased by a debit, $10,000. Ben Furman, Capital, has a normal credit balance and is increased by a credit, $10,000. * both sides of the equation are changed by the same amount and, therefore, balances. For a transaction in which cash is received, the cash account is always increased.
8 8 Paid for Supplies $ (pg. 56) Supplies Any Asset Debit side Increase Credit side Decrease Debit side Credit side Increase Supplies Debit side Credit side Decrease 1) What accounts are affected? and Supplies. 2) How is each account classified? is an asset with a normal debit balance. Supplies is an asset with a normal debit balance. 3) How is each account balance changed? is decreased; Supplies are increased. 4) How is each amount entered in the account? The asset account,, has a normal debit balance and is decreased by a credit, $1577. The asset account, Supplies, has a normal debit balance and is increased by a debit, $1577.
9 For a transaction in which cash is paid, the cash account is always decreased. 9
10 10 Paid for Insurance $1200 (pg. 57) Prepaid Insurance Any Asset Debit side Credit side Increase Decrease Debit side Credit side Increase Prepaid Insurance Debit side Credit side Decrease 1) What accounts are affected? and Prepaid Insurance. 2) How is each account classified? is an asset with a normal debit balance. Prepaid Insurance is an asset with a normal debit balance. 3) How is each account balance changed? is decreased Prepaid Insurance is increased. 4) How is each amount entered in the account? The asset account,, has a normal debit balance and is decreased by a credit, $1200. The asset account, Prepaid Insurance, has a normal debit balance and is increased by a debit, $1200.
11 11 Bought Supplies on Account $2720 (pg. 58) Supplies Butler Cleaning Supplies Any Asset Any Liability Increase Decrease Decrease Increase Supplies Butler Cleaning Supplies +$2720 Decrease Decrease +$2720 1) What accounts are affected? Supplies and Butler Cleaning Supplies. 2) How is each account classified? Supplies is an asset with a normal debit balance. Butler Cleaning Supplies is a Liability with a normal credit balance. 3) How is each account balance changed? Supplies is increased. Butler Cleaning Supplies is increased. 4) How is each amount entered in the account? The asset account, Supplies has a normal debit balance and is increased by a debit, $2720. The liability account, Butler Cleaning Supplies, has a normal credit balance and is increased by a credit, $2720.
12 12 Paid on Account $1360 (pg. 59) Butler Cleaning Supplies Any Asset Any Liability Increase Decrease Decrease Increase Butler Cleaning Supplies Increase Increase 1) What accounts are affected? and Butler Cleaning Supplies. 2) How is each account classified? Supplies is an asset with a normal debit balance. Butler Cleaning Supplies is a Liability with a normal credit balance. 3) How is each account balance changed? is decreased. Butler Cleaning Supplies is decreased. 4) How is each amount entered in the account? The asset account, has a normal debit balance and is decreased by a credit, $1360. The liability account, Butler Cleaning Supplies, has a normal credit balance and is decreased by a debit, $1360.
13 13 Received from Sales $525 (pg. 60) * Revenue increases the owner s capital. * The increases from revenue could be recorded directly in the owner s capital account. However, to avoid a capital account with a large number of entries and to summarize revenue information separately from the other records, we will use a separate revenue account. * The owner s capital account has a normal credit balance. * Therefore, a revenue account also has a normal credit balance. * Revenue accounts increase on the credit side and decrease on the debit side. * The revenue account we will use for sales transactions is Sales. Ben Furman, Capital +$525 +$525 (revenue) Any Revenue Account Debit side Credit side Decrease Increase Sales +525 Decrease Decrease +525
14 14 Paid for an Expense $250 (pg. 62) * Expenses decrease the owner s capital. * The decreases from expenses could be recorded directly in the owner s capital account. However, to avoid a capital account with a large number of entries and to summarize expense information separately from the other records, we will use a separate expense account. * The owner s capital account has a normal credit balance. Decreases are shown as debits. * An expense account has a normal debit balance. * Expense accounts increase on the debit side and decrease on the credit side. * The expense account used to record the payments of utility bills is Utilities Expense. These include payments for electricity, telephone, gas, water, sanitation, etc. Ben Furman, Capital $ (expense) Any Expense Account Debit side Credit side Increase Decrease Rent Expense Increase Decrease 1) What accounts are affected? and Rent Expense. 2) How is each account classified? is an asset with a normal debit balance. Rent Expense is an expense with a normal debit balance.
15 15 3) How is each account balance changed? is decreased. Rent Expense is increased. 4) How is each amount entered in the account? The asset account, has a normal debit balance and is decreased by a credit, $250. The expense account, Rent Expense, has a normal debit balance and is increased by a debit, $250. Do not confuse the words debit and credit with increase or decrease. Debit only means the left side of an account; Credit only means the right side of an account.
16 16 Paid to Owner for Personal Use $100 (pg. 63) * Assets taken out of a business for the personal use of the owner are known as withdrawals, and are considered to be part of the owner s equity taken out of a business. Therefore, withdrawals decrease owner s equity. * Withdrawals could be recorded as decreases directly in the owner s capital account, however, common accounting practice is to record withdrawals in a separate account to provide a separate record of the withdrawals for each fiscal period. In this way, the owner knows how much has been withdrawn from the business each fiscal period. * An account that reduces a related account on a financial statement is called a Contra Account. * The Drawing account is a contra capital account because the account shows decreases in capital. * The owner s capital account has a normal credit balance. Decreases are shown as debits. * A drawing account has a normal debit balance. * A drawing account increases on the debit side and decrease on the credit side. Ben Furman, Capital -$ (withdrawal) A Contra Capital Account Debit side Credit side Increase Decrease Ben Furman, Drawing Increase Decrease
17 17 1) What accounts are affected? and Ben Furman, Drawing. 2) How is each account classified? is an asset with a normal debit balance. Ben Furman is a contra capital account with a normal debit balance. 3) How is each account balance changed? is decreased. Ben Furman, Drawing is increased. 4) How is each amount entered in the account? The asset account,, has a normal debit balance and is decreased by a credit, $100. The contra capital account, Ben Furman, Drawing, has a normal debit balance and is increased by a debit, $100. SUMMARY OF ANALYZING TRANSACTIONS INTO DEBIT AND CREDIT PARTS Cover with students in class. Assignment: Be sure you know and understand: accounting terms 4-5, pg. 66. questions 6-17, pg. 66. Case 2, pg. 66 in class. Drills 4-D1 and 4-D2, pg. 69 in class. Problem 4-1 in class, pg record answers in workbooks Problem 4-M, pg. 69. V. Closure: To review for test do Study Guide 4 and Problem 4-M.
18 18 VI. Evaluation of Student Learning: Students will be evaluated using Problem 4-M, and Chapter 4 test. Reference List Ross, K.E., Hanson, R.D., Gilbertson, C.B., Lehman, M.W., & Swanson, R.M., (1995). Century 21 Accounting: First-Year Course (6th ed.). Cincinnati: South-Western Publishing Co. Working Papers and Study Guides - Century 21 Accounting (6th ed.). Cincinnati: South-Western Publishing Co. Viking Marine Business Simulation. Cincinnati: South-Western Publishing Co.
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