CENTURY 21 ACCOUNTING © Thomson/South-Western

Accounting EquationAccounting Equation

1

LESSON 2-1

value of all things owned (assets)

values of all equities (claims against)

In Chapter 1 we learned the accounting equation: Left side of equation = Right side of equation = Left side always = right side or:

Assets = Liabilities + Owners Equity

Large number of accounts = cumbersome to use as a financial record.

CENTURY 21 ACCOUNTING © Thomson/South-Western

In Chapter 1 we learned How a transaction impacts accounts:

Two accounts always adjusted in a transaction Are the accounts impacted: an asset, liability, or owner’s equity Determine if the balance of the account goes up or down Transactions change the balance of an account in the equation.

The equation is unchanged Assets = Liabilities + Owner’s Equity

2

LESSON 2-1

CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 2-1LESSON 2-1

Using T Accounts Account: a record summarizing all the information for a single

item in the accounting equation T Account: is the accounting device (tool) used to analyze

accounting transactions Determines how a transaction changes the balances of

accounts – does the account increase or decrease

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4

LESSON 2-1

ANALYZING THE ACCOUNTING ANALYZING THE ACCOUNTING EQUATIONEQUATION page 28

We represent the accounting equation as a “T” Account:

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List Our AccountsList Our Accounts

5

LESSON 2-1

Cash, Supplies, Account’s Receivables, Petty Cash and Prepaid Insurance

Accounts Payables Capital Account

AND we list each account on the appropriate side, each with it’s own T account:

CENTURY 21 ACCOUNTING © Thomson/South-Western

TERMSTERMS

T Account: is the accounting device used to analyze accounting transactions

Debit: = an amount recorded on the left side of a T account

Credit:= an amount recorded on the right side of a T account

Normal balance: the side of the account that is increased (hint : the side of the T account that corresponds with the side of the accounting equation)

LESSON 2-1

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ACCOUNTSACCOUNTS

Where is the Debit and Credit side of a T account?

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NORMAL BALANCENORMAL BALANCE

Where is the normal balance Same side of T account that corresponds with the side of the

accounting equation The “normal balance” side increases the account Decreases on the opposite side of normal balance

LESSON 2-1

CENTURY 21 ACCOUNTING © Thomson/South-Western

DRAW IT Examples:DRAW IT Examples:

Draw it:

Cash is an Asset Assets are on which side of equation? What side is considered the “normal balance” for cash? Which side of Cash increases? Which side

decreases? Does it increase as a Debit or a Credit?

LESSON 2-1

RightLeft

Left

Debit

Left

Cash

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DRAW ITDRAW IT

Examples:

Draw in your notes the Capital account (Owner’s Equity) Owner’s Equity is on which side of equation? What side is the Normal Balance? Which side increases? Which side decreases? Does it increase as a Debit or a Credit?

10

LESSON 2-1

Credit

Right

LeftRight

Right

Cash Capital

Normal Bal.+ - Normal Bal.

+ -

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11

LESSON 2-1

ASSET NORMAL BALANCESASSET NORMAL BALANCES page 29

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12

LESSON 2-1

LIABILITY NORMAL BALANCELIABILITY NORMAL BALANCE page 29

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13

LESSON 2-1

OWNER’S EQUITY NORMAL BALANCEOWNER’S EQUITY NORMAL BALANCE page 29

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TERMS REVIEWTERMS REVIEW

T account debit credit normal balance

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WORK TOGETHER 2-1WORK TOGETHER 2-1